40 Acres and a Mule. Broken Promises, Black Wealth Inequality, Persistence of Housing Segregation and Exclusion, and How to Right (some Of) These Wrongs

• Publication year: 2021
• Author: Chinyere Agbai, Branden Butler, and Paula Pearlman

40 Acres and a Mule. Broken Promises, Black Wealth Inequality, Persistence of Housing Segregation and Exclusion, and How to Right (Some of) These Wrongs1

Chinyere Agbai, Branden Butler, and Paula Pearlman

Chinyere Agbai is a PhD Candidate in the Department of Sociology at Brown University. Her research seeks to uncover the roots of the racial wealth gap in homeownership and examine their consequences for racial inequality in wealth and health. Her work is published in Social Science Research and RSF: The Russell Sage Foundation Journal of the Social Sciences, and it has been supported by the Robert Wood Johnson Foundation and the NIH NICHD. She earned a Bachelor of Arts in Political Science from the University of Pennsylvania.

Branden Butler is the Assistant Deputy Director of Outreach and Education for the California Department of Fair Employment and Housing (DFEH). Prior to joining DFEH in 2019, Branden was the Senior Attorney of the Fair Housing Center of the Legal Aid Society of San Diego, Inc.

Paula D. Pearlman opened her own law practice during the 2020 pandemic focusing on monitoring post-litigation settlements, providing expert witness testimony, and conducting investigations and mediations. Throughout her legal career, Pearlman has been an advocate, professor and litigator for civil rights, and is a recognized expert in disability rights.

"[I]t is not the unintended consequences of individual choices and of otherwise well-meaning law or regulation but of unhidden public policy that explicitly segregated every metropolitan area in the United States."

— Richard Rothstein, The Color of Law

Homeownership is the largest financial asset class that most American families possess.² Despite this fact, significant racial inequality in wealth continues to exist and is the largest between White and Black households. In 2019, Black-White wealth inequality stood at an average of $164,000, with White households having an average net worth of $188,200 and Black families have an average net worth of just $24,100.³Given that home equity is the largest asset American families possess,⁴ homeownership serves as a significant proportion of the contemporary racial wealth gap. However, federal housing policies throughout American history have segregated Black Americans disproportionately, subsidizing homeownership for White families, while preventing Black families from amassing wealth to the same degree. In this article, we examine the ways that historic and contemporary housing policies have contributed to the large racial wealth gap, and outline what can be done to right some of these wrongs.

PART 1: HISTORICAL ORIGINS OF REDLINING AND THE INSTITUTIONALIZATION OF RACISM IN THE MORTGAGE MARKET

While land ownership following the Civil War was technically permitted for Black Americans, states erected barriers to land ownership, confiscated property, and created sharecropping systems that intentionally hampered wealth accumulation.⁵ The Thirteenth Amendment, abolishing slavery that endured for hundreds of years in the United

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States, did not take steps to ensure formerly enslaved people had the legal ability to own land in the post-Civil War America. The Civil Rights Act of 1866⁶ marked the first time the United States government enacted a specific civil rights law, one which enabled newly freed slaves to own land. The legislation granted all citizens the "full and equal benefit of all laws and proceedings for the security of person and property." The following provision, however, was deleted from the final version of the Civil Rights Act of 1866: "There shall be no discrimination in civil rights or immunities among the inhabitants of any State or Territory of the United States on account of race, color, or previous condition of servitude."⁷ Despite the Civil Rights Act of 1866, or even its successor more than 100 years later, the Fair Housing Act of 1968,⁸ racial discrimination against Black Americans has dramatically impacted the opportunity to build generational and household wealth.

Federal policy has been instrumental in the creation and exacerbation of racial inequality in homeownership, and therefore in the creation and building of wealth. During the Great Depression, the federal government began to play a more active role in the private market for housing in an effort to rescue the real estate market from ruin. However, in the process, federal agencies also standardized and popularized the use of racial discrimination in the process of determining creditworthiness and property value. These New Deal and post-World War 1 era race-conscious procedures would alter the racial and spatial landscape of American neighborhoods while precluding Black Americans from building wealth through home equity to the same extent as whites for decades to come.

In an attempt to rescue lenders and borrowers from the large number of home foreclosures during the Great Depression, the Roosevelt Administration created the Homeowners Loan Corporation (HOLC) in 1933. By purchasing delinquent mortgages from banks and refinancing them with long-term, low-interest loans, the creation of the HOLC gave the federal government a more active role in the private market for housing.

Though the HOLC provided access to homeownership on more favorable terms, it also institutionalized considerations of race and racism in the mortgage lending process. To mitigate the increased risk that the federal government was taking on by becoming invested in the private housing market, the HOLC, in collaboration with local realtors and lending institutions, began ranking neighborhoods based on perceived lending risk in "Residential Security Maps." These maps ranked neighborhoods from most desirable and valuable (A or green) to in decline and least valuable (D or red). Considerations of race were included explicitly in this ranking system. Newly-constructed neighborhoods primarily populated with White, middle-class, Christian residents (due to racial and religious covenants) were often given an A rating. Conversely, neighborhoods with older, deteriorating homes or those populated by non-Whites were assigned a D rating, or redlined. Working-class neighborhoods with European immigrants were often assigned C or D. However, the vast majority of neighborhoods with even a few Black residents were redlined, regardless of the physical condition of homes.

HOLC's Residential Security Maps were not the first time that race and notions of creditworthiness and home value were linked in this way. This practice had been in operation in real estate since the 1920's. However, the HOLC's practice of redlining standardized and expanded the use of this kind of racial calculus on a large scale. For instance, throughout the 1930s and 1940s, lending institutions created their own procedures that were heavily influenced by the HOLC's Residential Security Maps to determine the kinds of neighborhoods where they would finance mortgages.⁹ For example, appraisals were conducted by real estate agents who were bound by national ethics codes to maintain segregated neighborhoods.¹⁰ By modeling their procedures after the HOLC's practice of redlining, banks further institutionalized racial discrimination into the mortgage market.¹¹

The most far-reaching effects of the use of racial considerations in determinations of creditworthiness manifested in the adoption of the discriminatory housing practices by the Federal Housing Administration (FHA). Established in the 1937 National Housing Act, the FHA drastically reduced the amount buyers were required to put down when purchasing a house by guaranteeing loans made by private lending institutions. As a result of the FHA loan program, homebuyers were required to put 10 percent down on a home, rather than the 33 percent minimum that was required before the program. In determining which mortgages to back, the FHA produced its own racist procedures. The FHA articulated its racial considerations in the 1938 Underwriting Manual, which standardized property evaluation procedures throughout the United States.¹² The manual prohibited realtors, and therefore lenders and builders, from introducing "incompatible" groups into White neighborhoods in an effort to "retain stability" and maintain property values.¹³ The FHA also endorsed racially-restrictive housing covenants, which prohibited white homeowners from selling their properties to non-White buyers. In creating nationwide property evaluation standards that made distance from Blacks integral to creditworthiness and high property

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values, the FHA further institutionalized race and racism in the real estate market.

One important implication of the FHA inextricably linking race, creditworthiness, and property value was the way that these standards were later applied in the implementation of the 1944 GI Bill. The 1944 GI Bill provided a host of benefits to returning soldiers, including U.S. Treasury-backed home loans under the Home Loan Guaranty (HLG).¹⁴ The HLG program permitted veterans to purchase a home without a down payment and committed the federal government to paying for the first year of interest on the mortgage at interest rates of up to 4 percent.¹⁵ By June of 1956, the Veterans Administration (VA), the government entity guaranteeing loans under the HLG program, had guaranteed more than 4.5 million home loans, totaling $19.6 billion.¹⁶ By providing home loans on these favorable terms, the HLG program gave many returning soldiers a boost into the middle class. The HLG program helped 42 percent of WWII veterans become homeowners by 1956, while just 34 percent of non-veterans of comparable ages owned homes.¹⁷

Despite its role in boosting many veterans into the middle class through homeownership, the implementation of the HLG program was riddled with racial inequality as a result of FHA appraisal standards, including redlining, and segregation with racially restrictive covenants. Following the appraisal standards...