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By: John D. Borders, Jr.
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The History of Redlining and its Impact Today
Written by:  John D. Borders, Jr. - Borders & Borders, PLC
There’s a movement afoot in our country right now for racial justice. The recent deaths of Ahmaud Arbery, George Floyd, Breonna Taylor and others have sparked protests the size and likes of which we haven’t seen since the 1960s. If we’re going to understand this movement, if we’re going to begin to understand where the frustration, anxiety, anger and exhaustion we’re seeing from Black people comes from, we have to look backward. We have to examine its roots. We have to evaluate the systems and events that, beginning decades and even centuries ago, put our country on the inevitable trajectory that brings us to this point today.

One of the most significant factors affecting wealth—and its absence in Black communities—is homeownership. Equity in a home is the largest asset for most families.  That’s not so surprising. What is surprising is that homeowners have, on average, 80 times the median net worth of renters. According to US Census Bureau researchers Jonathan Eggleston and Donald Hays, using 2015 data, equity in a home accounts for 34% of the average household’s net worth. And while non-Hispanic white households had on average $139,300 of wealth, Black households had only $12,780. Household net worth, of course, changes everything for that family. If there’s an illness, a loss of a job, additional tuition for college, or a family emergency, household wealth provides the buffer. Homeowners can leverage their equity by taking out equity lines to gain access to money. And when that homeowner dies, she could pass that wealth on to her family, who then may be able to buy their own homes, pay college tuition or buy health insurance. When you have no wealth, those aren’t options. You have no safety net, no way out, and nothing to leave to your children.         

Many of us think that Black households today have only a fraction of the wealth of white households because of individual choices made in this generation, or that slavery, Jim Crow and discrimination are so long ago that they don’t impact household wealth today. It’s understandable that we don’t know this history. I’ve been a real estate attorney for more than 30 years and only recently did I learn how the government—not just racist individuals—intentionally and systematically eliminated opportunities for Black wealth in America. This story has rarely been taught in school and we have never been made to understand it. But if we want to understand the unrest we see in the streets today—and if we want to try to right the wrongs that our government for centuries perpetrated --we have to take the time to understand how we got here.

Immediately following Reconstruction in the late 19th century, the government—all branches and levels—encouraged and facilitated segregation and disparity of opportunity. It wasn’t an accident and it didn’t happen a few times. It was planned, designed and executed by the government, in partnership with private industry and individuals.

In 1917, motivated by a fear of communism, the government began encouraging homeownership as a patriotic duty. The Department of Labor published more than two million posters—all with white faces on them—to encourage people to buy homes instead of renting them. Under Secretary of Commerce Herbert Hoover, Better Homes in America encouraged whites to move to the suburbs, away from African American families.

During the Great Depression, Roosevelt’s New Deal was particularly important because it helped people out of poverty and because it informed the economic structure of our country. But from the start, the New Deal left African American families out. The Public Works Administration (PWA) built the first public housing for civilians. All of the projects were segregated by race. In many instances, neighborhoods that were once integrated were now segregated. And it concentrated African American families in low-income neighborhoods. From the start, the government created housing opportunities for whites while leaving African Americans with little or none. And it intentionally segregated communities.

Because most white families could not pay cash for a home or get a mortgage, the Home Owners’ Loan Corporation (HOLC) was created, giving people an opportunity to borrow money with mortgages amortized over time. Suddenly, homeownership was possible for middle class families. Because they wanted to keep neighborhoods segregated, and because they only wanted to make loans to white families, the HOLC solicited real estate agents to help them color-code neighborhoods. Neighborhoods that were deemed the least risky (aka white) were given the color green while riskier (aka Black) neighborhoods were given the color red. These designations were based purely on race, not on the quality of the neighborhood. Maps were created with these color codes and "redlining" was born. African Americans were now deemed by the government to be risky investments so, naturally, private banks and lenders followed suit, utilizing the same maps to make loans to whites only. If you’re interested, you can find Louisville’s redlining map here.

The Federal Housing Administration (FHA) was created in 1934, insuring bank mortgages. This meant that banks could take risks on homeowners because the government would insure those loans; in other words, the government would take the risk rather than the lender. And people wanting to own homes could now afford to get a loan, borrowing money over time.

Before insuring loans, FHA required the bank to use an FHA appraisal of the property. FHA’s appraisal standards would only permit loans to white borrowers. Racially mixed neighborhoods, and sometimes ones that were simply next door to Black ones, were deemed too risky for insurance. FHA’s Underwriting Manual said "If a neighborhood is to retain stability it is necessary that properties shall continue to be occupied by the same social and racial classes." Negative factors for an appraisal included "infiltration of inharmonious racial or nationality groups." Furthermore, FHA didn’t want banks making loans anywhere but in new suburbs. All the way up to 1952, the Underwriting Manual based risk on whether there was "compatibility among the neighborhood occupants." They weren’t concerned about creditworthiness. They were concerned about race.  The VA soon followed suit, adopting FHA’s policies.

FHA’s and VA’s influence on homeownership cannot be overstated. Whites were now able to get loans on fair terms from banks that previously wouldn’t take the risk but now could because the government was insuring the loans. Blacks, even those with good credit, were not given that same opportunity. Equally impactful, FHA and VA created racially segregated neighborhoods by requiring deed restrictions that prohibited African American families from moving into the neighborhoods. Deed restrictions of this sort would soon be the norm around the country. New homes would be built in safe neighborhoods but they would only be occupied by white families. This changed the face of America: the middle class would be almost exclusively white. To be clear, success and failure had a lot to do with opportunity, created and fostered by the government.

In 1940, the Lanham Act provided financing for war housing. In some places it was given only to whites. In others, it was given to African Americans as well but only in segregated neighborhoods. Under President Truman, the 1949 Housing Act made things worse for African American families. Public housing was necessary for those who could not afford to buy a home but the Act allowed segregated housing facilities. This effectively left African Americans concentrated in high-rise slums with no access to wealth, little access to jobs (which had mostly moved out to the suburbs) and with none of the protections that a safe home in a safe neighborhood offers. Public housing had become a ghetto. It’s important to note that this occurred during the Great Migration, when six million African Americans moved out of the South because of violence, discrimination and little opportunity. This exodus from the towns and cities of the South into almost exclusively large cities in the North and West meant that there was an urgent need for decent housing for millions of displaced people.

Following the federal government’s lead, state and local zoning laws—well beyond when they were declared unconstitutional—made things worse. Toxic and polluting industries and businesses were zoned into areas populated almost exclusively by African Americans. Deed restrictions or "restrictive covenants" were created, and enforced by courts, in order to keep Blacks out of white neighborhoods. Realtors® didn’t help matters. The National Association of Real Estate Board (NAREB) code of ethics stated that "a Realtor® should never be instrumental in introducing into a neighborhood…members of any race or nationality…whose presence will clearly be detrimental to property values in that neighborhood." The NAREB handbook for brokers warned them to be prepared to address "a colored man of means who was giving his children a college education and thought they were entitled to live among whites."

In 1948, the Supreme Court declared restrictive covenants unconstitutional in Shelley v. Kraemer but FHA ignored the law, encouraging them to be included in neighborhoods. This didn’t really stop until 1962. And while the Shelley case prohibited courts from allowing evictions of Black residents because of restrictive covenants, these restrictions could still be enforced in civil suits for damages until 1972.

Because African American families were legally and practically excluded from safe neighborhoods, loans and, therefore, homeownership, many tried unconventional ways to buy homes. Rent-to-Own and Contracts for Deed (where the owner carries the financing for the buyer) became popular around the country, including in Louisville. Under these agreements, people trying to buy homes would often pay usurious interest rates or would lose their homes after paying for years because they missed a single payment. Sellers on a Contract for Deed were legally allowed to evict someone who had made payments for years if they missed a single payment. This, of course, led to the further destruction of houses and neighborhoods and stability when tenants did anything they could to keep their houses, including renting rooms to multiple people so they could afford the monthly payment. That changed in Kentucky anyway in 1979 when our highest court ruled in Sebastian v. Floyd that sellers couldn’t evict a homeowner and would have to foreclose (with all of its protections for borrowers) in a Contract for Deed.
 
In the housing crisis of 2008, we learned that many defaulting borrowers had been victims of "reverse redlining," where banks and lenders targeted African American borrowers—regardless of their credit worthiness-- for subprime loans (where the interest rates and terms are predatory). When the housing crisis occurred, these homeowners were among the first to lose their homes. We saw this extensively in West Louisville, where property values plummeted and houses were "upside down," meaning that they weren’t worth as much as the mortgage amount. People who had made payments for years on their mortgages were trapped and could never sell their homes if they wanted to get their money back. That is still the case with many homeowners today in West Louisville. This has led to the further demise of the neighborhood and its residents’ ability to build wealth.

Maya Angelou wrote, "History, despite its wrenching pain, cannot be unlived, but if faced with courage, need not be lived again." Only when we have an understanding of what happened in the past—how our government and society has systematically excluded African American families from homeownership, and therefore from wealth; how West Louisville isn’t a mistake but, rather, looks exactly as it was intended; how fears, frustrations and anger are playing out in the streets today—can we move fully informed into the future. There’s also a different level of responsibility and desire to help that comes from understanding that it was our government--and not just a few racist individuals or banks--that created many of the problems our Black citizens face today.

West Louisville needs—nay, deserves—responsible real estate investment. At a minimum, real estate investors who buy properties in West Louisville owe it to the residents to pay a fair value for the home—regardless of the desperation of the homeowner. Seizing a deal because we can ignores history. It ignores the disparity of opportunity and the balance of power between the parties. Responsible real estate investing also means renting or selling to others in the neighborhood on fair terms. Real estate investors are entitled to earn a profit but we aren’t entitled to plunder a neighborhood and its people who have been systematically left out of opportunity for generations. Ideally, responsible real estate investing would mean buying properties, fixing them up, and then selling them on fair terms to buyers. Many will need Rent-To-Own, Contracts for Deed or Owner Financing. Rent-To-Own should be converted to Contracts for Deed or Owner Financing as soon as the borrower has built reasonable equity. Many buyers will need help finding homeownership counseling programs, like the one offered at the Louisville Urban League. When you’re the first person in generations to own a home, homeownership literacy doesn’t come naturally. People deserve to have the tools that will make them successful. This takes time and it takes effort, but it’s a good investment. And one that benefits everyone.

I am proud of the real estate community in which my firm practices. The vast majority of Realtors® are fair and would never actively discriminate against someone on the basis of race. Almost none of us are responsible for decisions made by the government or racist individuals from the past. This isn’t about blame or guilt. But once we understand what happened to deny Black families of critical family wealth, I contend that we have a responsibility to do our part to address it. Please join our firm in finding creative ways to help homeowners and ethical real estate investors in West Louisville. We can all work together to promote Black homeownership. As Realtors® , appraisers, home inspectors, lenders and attorneys, we are uniquely qualified in our community for this task: It could mean teaching classes to first time homebuyers; discounting or waiving our fees for poor Black families; investing ethically in West End properties; volunteering for organizations that promote Black homeownership; or making donations to non-profits addressing these issues. By doing this as a profession, we’ll be honoring our nation’s and our city’s history, recognizing the past that created what we see today in poor communities. As a real estate industry, let’s invest in a city worth living in—for all of our citizens. If we’re concerned about unrest, about looting, about violence, about justice, about peace, we first acknowledge our past and then we allow it to inform our future.

 

Greater Louisville Association of REALTORS
6300 Dutchmans Pkwy, Lou, KY 40205   |   502-894-9860   |   www.LouisvilleRealtors.com

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