Academic journal article Journal of the Illinois State Historical Society

Historic Home Mortgage Redlining in Chicago

Academic journal article Journal of the Illinois State Historical Society

Historic Home Mortgage Redlining in Chicago

Article excerpt

THE POLICIES OF THE NEW DEAL DRAMATICALLY changed the political economy of the nations urban areas, initiating, as one urban historian aptly characterized, "the overdevelopment of suburbs and the underdevelopment of cities."1 In very quick succession, the federal government adopted new and sweeping policies-regulation of the financial industry, extensive public works programs building all manner of infrastructure, a dramatic increase in public employment, the creation of nationally funded relief for the unemployed, financial assistance to the states and cities, a national industrial planning effort, an emergency program to refinance homes, the development of a national housing program, and many others-each responding to one or more of the host of daunting problems brought on by the Depression.2 Many of these new federal programs became permanent fixtures in the American administrative landscape, laying the foundations for new (and different) patterns of economic development in the future.

Housing policy was especially important in creating the basis for wide scale shifts of investments and population as well as the dramatic changes in the demography of the urban core and its suburban rings. New Deal policies, designed to re-establish investment confidence in the housing sector as well as to restore employment in home construction in the depths of the Depression3, achieved these objectives (sometimes, much later) but in so doing brought about large scale disinvestment from the housing markets across the urban cores of American metropolitan areas while at the same time creating a powerful set of incentives for developers to construct, financial institutions to lend, realtors to sell, and large swaths of the American social strata to purchase newly developed housing that were located in increasingly decentralized areas away from America's central cities.4

One particularly important outcome of these policies is home mortgage redlining-the publicly created disinvestment of a surprisingly large portion of the standing housing stock across wide swaths of central city neighborhoods. Historical redlining was geographic in character and resulted from public policies formulated at the national level and the actions of federal agencies that implemented these policies.5 Federal agencies established empirically based risk assessments of community housing markets based on both the quality, amenities, basic structural features, and upkeep of the housing stock as well as the social class, ethnic, and racial makeup of residents of a neighborhood.6 On the basis of these assessments, a large portion of the nation's neighborhood housing markets were determined to pose too high a risk for the newly established long term, fully amortized mortgages that were created by New Deal legislation. These areas were denied mortgage insurance and redlined. Relatively few neighborhoods, communities where housing at that time was relatively new, had a full complement of amenities and were in good repair, were deemed an acceptable risk. In these areas, mortgage insurance was granted and conventional mortgages were available to purchasers to facilitate the exchange of real estate. Additionally, almost all newly constructed housing from this time forward-in suburban locations-would be the beneficiaries of this federal insurance program.

The New Deal Policy Sources of Mortgage Redlining

Two pieces of New Deal legislation transformed the regulation of financial institutions and revolutionized housing financing in the U.S. These were the Banking Act (1933) and the National Housing Act (1934) that respectively created a national system of deposit guaranty and mortgage insurance, and new agencies, the Federal Deposit Insurance (FDIC) and the Federal Housing Administration (FHA), to implement these programs. The FDIC (and later the Federal Savings and Loan Insurance Corporation [FSLIC]) and the FHA were established as public corporations that were financed not from appropriations from Congress but from fees these agencies were permitted to charge to financial institutions and mortgagees. …

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