"Real Estate Exploitation Produces Ghettos"


"Real Estate Exploitation Produces Ghettos"


Sam Harman
Dr. Sharon Leon
December 7, 2010

The Role of the FHA in Creating
Racial Ghettos in Chicago
The Federal Housing Administration, created to stabilize the housing market in the aftermath of the Great Depression, played a major role in the construction of racial ghettos in Chicago, Illinois. The successor to the Home Owner’s Loan Corporation, the FHA differed by not providing direct loans (as did HOLC), and having an objective to “insure long-term mortgage loans made by private lenders for home construction and sale.”1 The FHA helped to create racial ghettos in cities such as Chicago by instituting blatantly racist policies in the FHA Underwriting Manual of 1938 as well as the underwriting manuals of later years. The FHA’s policies also trickled down to affect local housing markets on the level of individual actors; private lenders, homeowners and sellers, and real estate agents were forced to adhere to the guidelines of the underwriting manual to qualify for FHA mortgage insurance. Because of this, landlords and homeowners resisted accepting African Americans as their neighbors, fearing a decline in property values. Since the FHA granted risk ratings to areas based on their racial make-up, this was not an unfounded fear; African Americans’ presence in a neighborhood meant that the FHA would refuse to grant mortgage insurance, making it difficult for private lending organizations to grant loans to anyone, white or black, who might choose to live in a racially mixed area. Among other tactics, racially restrictive covenants, and indirect support of racially discriminating zoning laws were all used to deter African Americans from cohabiting with white neighbors. Further, individual actors in the Chicago housing market took advantage of African American’s vulnerable position, often bamboozling them in business deals that left them without the means to move or improve their locations. African Americans were thus restricted to certain racially homogenous neighborhoods. Another FHA policy contributing to the construction of ghettos was the long-standing refusal to grant insurance for home-improvement mortgages to African Americans2. Even when the FHA began insuring loans in Chicago for home improvement in 1934, they maintained the right to determine the term of the note “entirely on the discretion of the financial institution.”3,.With no way to leave or improve their neighborhoods, African Americans were stuck in racially distinct and physically deteriorating neighborhoods. The result, as history shows, was the emergence of racial ghettos in Chicago. The racial ghettoization of African Americans in Chicago is representative of quintessential, but often ignored, aspect of the American experience: the placement of marginalized groups into a liminal state, an in-between condition experienced spatially, emotionally, and socially. Indeed, Victor Turner defines the liminal state as “an interstructural state in social dynamics” that may be experienced as a “physical, mental, or emotional condition.”4 Turner defines liminality in relation to the initiation rites of tribe societies, but the concept of liminality is applicable to American society as well. Effectively, a liminal state is a stopgap for transitioning peoples; in this case, American society forced the liminal period onto Chicago’s black community.
Of central importance to the FHA’s role in creating racial ghettos was its risk assessment program. To determine the risk of insuring mortgages in a particular neighborhood, an agency-approved inspector was sent to the area to check for, among other conditions, the presence of “inharmonious racial or social groups present in the neighborhood” and “danger of infiltration of such groups.”5 The practice of risk assessment was initiated by the Home Owner’s Loan Corporation (predecessor to the FHA) because, after the department’s creation, “in some states over 40 percent of all HOLC loans were foreclosed even after refinancing.”6 Ostensibly, the FHA’s risk-assessment program was a continuation of HOLC efforts to prevent risk-laden investments. Contrary to this claim is the fact that
“ a study (the first of its kind to be reviewed by the FHA) performed by an economist in San Francisco… concluded that the introduction of black residents into predominantly white neighborhoods in the San Francisco Bay Area had no statistically significant impact on the values of the neighborhood’s properties.”7
Arnold Hirsch claims that pure racism was the true motivation for these discriminatory policies: “ a conscious, deliberate choice lay at the heart of national policy.”8
Whatever the case, such risk assessment programs effectively denied prospective African American homeowners the opportunity to secure a federally insured mortgage. Kimble says it this way, “by equating African Americans with risk, the FHA produced a lending drought in neighborhoods of mixed racial composition and directed the rain of capital to fall exclusively over homogenous, white suburbs.”9 Without access to the funds necessary to buy new homes or to improve the conditions of their existing homes, many homes in heavily black areas fell into disrepair. The FHA, largely responsible for these conditions in the first place, used these trends to further justify the denial of mortgage funds to African Americans:
“[black neighborhoods] have become highly congested, over-used, and largely substandard. As a result, the program of FHA mortgage insurance can have limited application in such areas for purely economic reasons… [it is] inordinately difficult and often impossible for prospective Negro buyers to qualify for FHA mortgage insurance.”10
While the Federal Housing Administration made direct attempts to prevent African Americans from penetrating white neighborhoods for the reported purpose of protecting property values, they also supported and encouraged tactics at the level of base actors to discourage racial mixing in residential areas. Racially restrictive covenants were a widely used tactic to legally prevent the transmission or sale of a property to African Americans, or any other undesirable racial group. The FHA’s underwriting manual of 1938 calls for the use of racially restrictive covenants as a prudent practice for developing communities to ensure continued growth in property values11. Racially restrictive covenants were used extensively in Chicago neighborhoods, and were essentially “an agreement between owners of several residential properties that none of them, their heirs, executors, administrators, or assigns, should sell or transfer any interest therein to any Negro” that “when recorded should continue in force for ninety-nine years.”12 Chicago saw particularly heavy use of such covenants, and the effect was marked racial stratification. Wendy Plotkin writes, “ a rage to adopt these covenants spread across Chicago, fueled by the [Chicago Real Estate] Board and local realtors.”13
Plotkin’s research reveals a subtle but no less nefarious effect of the FHA’s attempts to contain African American neighborhoods: the trickle-down effect on municipal housing authorities and lending agencies, such as the Chicago Real Estate Board, which relied largely on federally mandated procedural guidelines for their day-to day operations. “ The lasting damage done by the national government was that it put its seal of approval on ethnic and racial discrimination…More seriously, Washington actions were later picked up by private interests, so that banks and saving-and-loans institutions institutionalized the practice of denying mortgages.”14 The FHA’s endorsement of racially restrictive covenants meant that private institutions, too, would be forced to condone the policy, or lose funding at the accusation of ignoring federal directives. Municipal support of racially restrictive covenants was unabashed, and was considered boilerplate legal procedure for new homebuyers or sellers. The fact that Chicago had a “standard covenant drafted by Nathan William MacChesney, a member of the Chicago Plan Commission”15 speaks volumes about how Chicagoans viewed and implemented the discriminating practice. Collectively, racially restrictive covenants and the FHA’s risk assessment policies represent the first level of liminality thrust onto black Chicagoans: spatial in-betweenness. African Americans in Chicago were silently told that they were a class of citizens that, while accepted as part of the nation, were not entitled to the same benefits and social niceties as a superior class of citizens: white Americans. This manifested in Chicago’s housing, where blacks where not only restricted to a small segment of Chicago’s residential areas, they were rendered unable to improve the space they already occupied. The black communities intonation is represented well in the photograph of black and white men protesting FHA policy. A man in the foreground of the photograph carries a sign reading “real estate exploitation produces ghettos.” This photograph makes it clear that African Americans were well aware of the spatial liminality they were experiencing. Sadly, through the effects of FHA interference, they would experience states of social and emotional in-betweenness.
The FHA also required local lending organizations to “keep on file copies of the two most important types of maps, the Residential Security Maps and the Real Property Inventories.”16 The residential security maps were FHA internal documents that examined suburbs for factors that influenced the perceived risk to granting mortgage insurance for home loans made in that area. The maps rated areas on a scale of “A” to “D”, “with ‘A’ being most desirable and ‘D’ ensuring rejection.”17 Kimble notes that areas with fifteen or more percent black residents were routinely given a “D” grade, guaranteeing that residents would be barred from access to federally insured mortgages. This practice was known as “redlining” because large sections of grade “D” areas would be outlined in red ink in agency maps; redlined areas were known to have almost no chance to secure federal mortgage insurance and have been described as “how banks shunned poor neighborhoods.”18 As noted earlier, African American communities in Chicago were unfairly assigned high risk, and many redlined areas earned their status through the race of its inhabitants.
As African Americans were barred from obtaining mortgages through FHA redlining and risk assessment policies, the private market saw the rise of “entrepreneurs” to filled the needs of families left unsatisfied by the government. A practice known as “contract selling” became particularly popular in Chicago. Contract selling involved the sale of a property through a contract on terms heavily favoring the seller, often allowing for repossession and eviction after tenants missed a single payment. Contract sellers began to buy properties, and lease them or sell them African American families at up to triple the original price, only to repossess the property after a single missed payment. Often, these contract sellers would immediately sell a repossessed property to another family eager to purchase a home. This exploitation is embodied in the experiences of the Bolton family, who purchased a home in Chicago’s Hyde Park neighborhood at a grossly inflated sum. The financial pressure levied by their high monthly payment and frequent demands of an unrelenting landlord left them unable to leave the neighborhood or improve their home. The practice of price gouging homes offered to African American families was commonplace in Chicago; since African American families were unable to obtain fair mortgages, they were limited to a narrowly defined list of neighborhoods. Property owners, aware of their limited options, often bought homes and immediately sold them or leased them to families at outrageously inflated prices. The scale of the unscrupulous price gouging was staggering: “ as one contract seller bragged, ‘ if anybody who is well established in this business in Chicago doesn’t earn 100,00 per year, he is loafing’.”19 The increase in price levied on the families, made possible in the market by the FHA’ s redlining and risk assessment policies, contributed mightily to the emergence of conditions that typify today’s urban ghettos. “[African American families] neglected basic maintenance. They subdivided their apartments, crammed in extra tenants, and, when possible, charged their tenants hefty rents.” (see 19) Under such conditions, African American owned properties became overcrowded and unsanitary, and often fell into states of disrepair that lowered the value of the property.20
Contract selling and the refusal of the FHA to grant insurance together represent the second and third levels of liminality experience by Chicago’s black community: emotional and social liminality. The widespread practice of contract selling sent a clear message to black Chicago: they were considered second-class citizens, and not worthy of the protections of ordinary citizens. Contract selling was almost as clear an expression of inequality as the Jim Crow laws of the South; it was accepted, even condoned practice for white citizens to exploit and profit off of the losses of their fellow citizens with black skin. “Where Do We Live and Why”, and editorial piece appearing in the widely-regarded Chicago Defender, reinforces the postulation that blacks experienced social liminality in Chicago. The author of the piece, even while calling for solidarity in the black community, identifies clearly why Chicago’s blacks live the way they do. Not only are they bereft of the legal advantages that would allow them to live comparably to their white counterparts, they are subject to the wheeling-and-dealing of less than scrupulous (and government sanctioned) real estate sharks. The situation was made worse through the government’s endorsement of these practices in application, making clear that the social marginalization African Americans was not the result of “market forces” as the FHA claimed. Indeed, the emotional toll must have been taxed black families as much as the social discrimination. Satter frequently recounts in her book how a lack of money for rent and home repairs caused anxiety for her parents, an experience that surely was not unique to the Satter household. As noted, the victimization of black families was considered standard practice by municipal organizations; that Chicago would direct a city employee to construct a standard restrictive covenant clause clearly demonstrates how the city viewed its black inhabitants. In reality, contract selling and restrictive covenants do not constitute everything contributing to the emotional liminality of Chicago’s African Americans; it was brought on by these factors in combination with many others. The knowledge that the government actively encouraged their exploitation, that there was no legal protection or recourse from greedy and unprincipled profiteers like Jay Goran (who sold the Boltons their first home); that they could not improve their homes, much less leave them; all of these contributed to reminding black Chicagoans that they were a class separate and unequal from white citizens. This is embodied well in the political cartoon “Opportunity versus Color”, which appeared in the Chicago Defender in 1934. While the cartoon explicitly highlights inequalities in business opportunities, the man’s dialogue represents well the emotional state of black suburban Americans. The man says in response to a woman’s advice to open a business. “I would, but I’m terribly worried about my color!” This cartoon, while an illustration, is certainly no exaggeration; African Americans had ample reason to worry about their color. Their color was at least the principal, if not sole, reason for the inequalities in jobs, housing, social status, and satisfaction with life pervading American cities after the Great Migration. Further, their emotional trepidation was furthered by mainstream America’s recent acceptance of previously marginalized immigrant groups. This is captured in “Opportunity Versus Color” in the skyline of Chicago, where text imprints of successful Greek, Jewish, Japanese, and Mexican businesses tower in stark contrast over African Americans made spatially constricted, socially immobile, and emotionally vulnerable through the prejudice of their peers.
Eventually, the deplorable housing conditions of Chicago came to national attention. The FHA received considerable pressure to address what even they acknowledged was overcrowded and deteriorating housing in urban black neighborhoods (see 10). The agency did give lip service to the problem of racial ghettoization, but documents show that the FHA forwarded discriminatory practices as late as 1949: “ The Manual still required lenders in mapping a city to outline neighborhoods ‘in such a manner that they will exhibit whenever possible a fairly high degree of homogeneity as to housing and population statistics’.”21The 1949 Underwriting Manual evidences that while explicitly racist language was omitted from codes regulating risk assessment, race still played a large role in determining whether the FHA would insure a mortgage. This continuation of discriminatory practice is partially responsible for the large concentration of African Americans neighborhoods in Chicago portrayed in racial distribution graphs.22
However, the FHA refused to accept that its policies contributed to the emerging housing crisis, and claimed that the conditions were more likely the result of private market forces than of explicitly racially biased policies. Kimble claims that the FHA, when confronted by the housing conditions of many blacks nation-wide, stalled the adoption of corrective policy under the pretense of conducting additional research which would “encourage the appropriate level of supply [available housing].”23 In 1947, the FHA appointed five “racial relations officers” in a perfunctory effort to allay the outcries of the African American community. In a study on housing policies in Atlanta, LeeAnn Lands recalls the impact of the appointees: “Such national level actions appear to have had little impact …home builders struggled to secure primary and secondary mortgage financing and faced white resistance to enlarging black-occupied areas.”24
“No agency of the federal government has had a more pervasive and powerful impact on the American people in the last half century than the Federal Housing Administration.”25 The evidence is clear. Social scientists mapping Chicago show how, even in 1934 before the FHA’s racist policies were exposed, African Americans were heavily concentrated only in a handful of Chicago neighborhoods. These practices were not exclusive to Chicago; as a federal agency the FHA influenced ghettoization and segregation in many American metropolises, among them Philadelphia, Atlanta, and New York. Occupying a powerful position in the American housing market after the Great Depression and dissolution of the HOLC, the FHA enacted blatantly racist policies and encouraged private lenders and homeowners to meter an equal measure of discrimination. As the 1938 Underwriting Manual shows, risk was unabashedly assigned to race; primary sources suggest that even other unpopular immigrant groups were more successful in securing housing loans than African Americans.26 The prejudices of the FHA and subsequent influence on private lenders, homeowners, and municipal authorities led to the racial covenants, contract selling, racial violence, and dearth of home improvement funds that created racial ghettos in Chicago. This segregation was the cause of spatial, social, and emotional liminality; thus the racial ghettoization of Chicago is the embodiment of the liminal experience in America, a state endured by many groups in many places beside black Chicago.
Works Cited







“"Real Estate Exploitation Produces Ghettos",” Inbetween Peoples, accessed September 23, 2020, https://as205.omeka.net/items/show/85.