In 1934, the Roosevelt Administration launched the Federal Housing Administration (FHA). The agency insures mortgages made by private lenders, protecting those lenders against losses. The agency was designed to promote home ownership during the Great Depression. Private lenders, including suburban developers here in this region, helped inform the policies the FHA would use to guide its lending, transforming private practices of exclusion into the federal policy of redlining. While suburban communities around cities across the nation were built up through the FHA, people of color and those living in integrated areas were overwhelmingly denied access to FHA programs. The FHA’s lending practices changed with the passage of the Fair Housing Act in 1968, but the legacies of the policy continue to shape realities today. The history of the FHA, which is inextricably intertwined with the history of redlining explored in the Johnson County Museum’s new special exhibit, REDLINED, reveals both the value of investment in communities and the long-lasting consequences of disinvestment.
An Era of Turmoil
When the Great Depression began in 1929, most Americans were concerned about affording food and rent, finding work, and making ends meet. Few considered buying or building a home. The real estate industry, through its national membership organization, the National Association of Real Estate Boards (NAREB), lobbied the federal government to help the struggling industry. NAREB leaders believed that two million of the 12 million unemployed people were in the building trades – by putting them back to work, the government could jump start the economy.
But homebuying was unattainable for many Americans prior to the Great Depression. The typical terms were 50 percent as a down payment with the other 50 percent of the home cost paid off over the next three to five years. Interest rates were high, there were no lines of equity, and often balloon payments drove homeowners out of their home in the final months of repayment. But NAREB had a plan to transform home buying. They just needed the federal government to help.
The Government Lends a Hand
When President Franklin D. Roosevelt’s Administration launched the New Deal programs after 1933, one of those programs was meant to help current homeowners in default. Called the Home Owners’ Loan Corporation (HOLC), it purchased mortgages in default to make the banks whole, and then extended new mortgages directly from the federal government using U.S. Treasury funds from taxpayers. This unprecedented intervention into the private real estate market came with unprecedented mortgage terms – low monthly payments, low interest rates, and longer loan terms.
The HOLC program was so popular, and the mortgage terms believed to be so accessible, that the federal government launched the Federal Housing Administration (FHA) in 1934. Through the FHA, the government sought to extend homeownership to as many white Americans as possible by extending unprecedented mortgage terms: 10 to 20 percent down payments, 20-year loan terms, low monthly payments, low interest rates, and amortization (equal payments with a portion going to the principal loan amount and a portion going to interest), as well as the potential to access equity as a line of credit. The FHA backed the mortgages by covering the insurance on the loan, taking all the risk off of the banks. The FHA made the threshold to buying a home so much lower, thereby making owning a home more accessible to far more Americans.
The FHA Builds Suburbia
The FHA program’s results speak for themselves. Suburbs across the nation exploded with new home builds and populations as young families bought or built their first homes. Following World War II, the Veterans Administration (VA) adopted the FHA’s policies and procedures to help place white veterans in new homes for zero money down. This aid helped the Greatest Generation become homeowners, something that their parents’ generation could rarely afford. By 1950, the FHA and the VA were backing 51 percent of all home mortgage loans. New housing starts reached 1.7 million in that year alone.
The FHA helped launch the idea of home ownership as the American Dream. Because mortgage payments were low ($39 per month in the 1940s, less than $700 in 2019 dollars), young families had more money in their pockets each month to save up, or to spend. The postwar era was known for consumerism, as Americans purchased second cars, washing machines, took vacations, saved up for college funds, and built additions to their homes. Most homes that received FHA-backed mortgages were new, and owners could be reasonably sure they would earn a profit if they sold their homes. Additionally, homeowners could access lines of credit through their equity to help maintain or enlarge their homes.
The investment in white suburban homes was massive. Historians and sociologists estimate that 11 million households purchased a home through an FHA-backed mortgage by 1972. One researcher estimated that the federal government extended mortgage insurance for over $120 billion in home purchases in the 1950s – or more than 1.239 quintillion 2019 dollars. This unfathomable number represents just the initial injection of money into suburban communities. The long-term consequences of this federal investment is incalculable.
In the Kansas City area, between 1934 and 1962, experts estimate the FHA extended more than 77,000 government-backed mortgage loans (this number does not include any VA-backed mortgage loans). Homebuyers in Johnson County received 16,624 of these mortgages. The county’s population skyrocketed, growing from 33,327 in 1940 to 143,792 by 1960.
“Federally Mandated Segregation”
Only some Americans were able to realize the benefits of the FHA and VA backed loans. This is evident by the growth in Johnson County’s population during the first decades of the policy – it grew by 110,000 white residents between 1940 and 1960, the Black population grew by just 150 residents. The growth in Johnson County’s white population stems from the FHA’s racially discriminatory lending practices. The FHA’s 1938 Underwriting Manual, the guide on how to work with the FHA, stipulated that eligible homes were required to have restrictive covenants (lists of rules governing how the property was used), including racially restrictive covenants to ensure a “prohibition of the occupancy of properties except by the race for which they are intended.” The FHA manual went on to explain that “if a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values.”
Th assumption that Black people and other communities of color devalue not only their own property but all the homes in the neighborhood surrounding them was rooted in NAREB’s policies and practices that had been honed for a generation prior. This belief, however, had no factual basis. No report or statistical analysis was ever produced to prove it. Still NAREB members worked as advisors to the federal government when the FHA was created, bringing their private discriminatory practices to the table as federal policy was being shaped. The FHA refused to work with Black Americans (and often Latinos, Asian Americans, and other communities of color) and explicitly required developers to exclude African Americans from their subdivisions. Richard Rothstein, author of The Color of Law, characterized the FHA’s discriminatory requirements as “federally mandated segregation.”
By 1947, 96 percent of suburban developments in Johnson County (148 out of 154 neighborhoods) were racially restricted. This means that Black families and other people of color were prohibited from owning, leasing, renting, or occupying homes there. Of the 77,000 FHA-backed loans in the Kansas City area between 1934 and 1962, less than one percent (770 at most) went to Black families, and often for older homes in segregated neighborhoods.
Changing the System
The homebuying system has changed today. First, racially restrictive covenants favored by real estate developers and required by the FHA were deemed unenforceable (not unconstitutional) by the U.S. Supreme Court in the Shelley v Kraemer decision in 1948 (the FHA permitted filing them through February 15, 1950). Additionally, Congress passed the 1968 Civil Rights Act, which made redlining – both the private practice and federal policy – illegal. Subsequent legislation, such as the Community Reinvestment Act, the addition of a presidential cabinet position for the director of Housing and Urban Development (HUD), and other federal regulations have worked to make home lending more equitable and accessible, especially for communities of color. The FHA continues to provide accessible mortgages to hundreds of thousands of Americans each year.
The FHA’s history is complex, full of incredible stories about launching homeownership for millions of families across the nation. Yet it is also a history full of heartbreaking stories of loan denials, exclusion, and discrimination. As a social program born out of the Great Depression, the FHA was integral to creating suburban communities like those located in northeastern Johnson County and around cities across the nation. Yet it shaped who could enjoy the benefits of more accessible home loan terms, who could enjoy the newly built suburbs, and who could realize the American Dream for decades.
For more information about the FHA, redlining, and related history, view the Johnson County Museum’s newest special exhibition, REDLINED: Cities, Suburbs, and Segregation. Included in Museum admission, and open for viewing Monday through Saturday, 9am to 4:30pm. Learn more: www.jcprd.com/Redlined.