Government and Housing Credit

A. THE SCOPE OF FEDERAL INVOLVEMENT

A Nation of homeowners

When the Federal Government first entered the field of housing on amajor scale it was principally concerned with relieving unemploymentin the building trades and restoring public confidence in our financialinstitutions. The Government's interest in housing conditions was subordinate to its concern with economic conditions. As a result its initialinvolvement in housing was characterized by a lack of any long-rangeplan and reliance on stimulation of private housing credit. The valueof homeownership, however, was emphasized from the outset. Privatecredit is still the chief context, and homeownership the chief emphasis,of Federal participation in housing; but both are now part of an enlarged, long-range program.

Before Government intervention, homeownership was difficult forthose lacking the full purchase price at the time of the sale. The prevalent financing vehicle was the short-term, unamortized, low loan-tovalue mortgage. Thus a family that wished to buy a $15,000 househad to have at least a $7,500 downpayment, for mortgage-lending institutions would rarely lend more than 50 percent of the value of ahouse, often considerably less. Such loans were frequently for periodsas short as 5, or even 3, years. Moreover, they were typically "straight,""unamortized" loans repayable not in equal monthly installments butin a large lump sum at maturity (refinancing was available only at ahigh premium fee). 1 The high rate and strict arrangement of interestcharges increased the difficulties.

Purchasing a home obviously was not easy. In 1920 there were only17/^2 million nonfarm dwelling units in the entire country, and only40 percent of them were owned by the occupants. (Nonwhites ownedonly 23.2 percent of the z l /z million farm and nonfarm residences thatthey occupied.) 2 Throughout the country less than 3 million (or 40

percent) of the owner-occupied homes were being purchased underany sort of financing arrangement. 8 The total outstanding mortgagedebt on nonf arm homes at this time was only $6 billion. 4

These home-financing practices changed radically in the years following the Federal Government's entrance on the scene. As a result of FHA-insurance and VA-guarantee programs, long-term, low-interest, highloan-to-value, fully amortized loans were made available on a large scalefor the first time. Conventional financing ultimately followed suit.A series of amendments to the National Bank Act, for example, enlargedthe home-financing powers of national banks. They were finally authorized in 1959 to make 2O-year, fully amortized real estate loans for up to75 percent of appraised value. 8 By 1960 the number of nonfarm dwelling units had tripled and the number of owner-occupied units had morethan quadrupled. Of the 30 million owner-occupied homes (60 percentof all occupied homes), less than 40 percent were unfinanced." Thus,7 times as many owner-occupied homes were being financed in 1960 asin 1920, and the outstanding mortgage debt on nonfarm residentialproperties had increased to $160 billion, 7 more than 20 times the 1920figure. Largely through governmental facilitation of housing credit, wehave become, for better or worse, a Nation of homeowners2014or, moreaccurately, of home mortgagors.

The Federal Government and the financial community

/'the means which the Federal Government has utilized in facilitatingAprivate housing credit has consisted principally of conferring benefits/on the private financial community, with the expectation that these bene-/ fits would ultimately redound to the home-buying public. The theoryhas apparently been that desirable housing ends can be achieved through

20222022» private credit institutions if the achievement of these ends is made economically profitable. Rather than establish publicly owned and managedinstitutions, the Government in most cases has sought to make its programs attractive to privately run institutions. It has done this in twoprincipal ways: through Federal mortgage insurance and guarantees,and through Federal sponsorship and support of many of the privateinstitutions themselves. 8 Federal involvement varies in degree accordingto the type of credit institution and the precise nature of the transaction,but it is clear that the Federal Government is the Atlas of the Nation'shome finance community, supporting the entire structure with its resources, its prestige, and its blessing. In this role, it has significant powerto help shape the Nation's housing future.

The Federal Government as supervisor of mortgage lenders. 2014At theCommission's hearing in Detroit, an elementary truth was expressed'regarding the function of mortgage lending institutions: "Mortgage

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financing is considered to be the fountainhead of the housing industry." 9

In Cleveland, Ohio, another truth was stated: "Banks dictate where

the Negroes can live." 10

These twin truths suggest the extensive civil rights implications of

Federal supervision of the financial community. The Federal Government has much to say about how privately owned and controlledmortgage credit institutions conduct themselves.

Savings and loan associations deal almost exclusively in home mortgage credit; of all financial institutions, they have been the most directlyaffected by Federal Government housing activity. Certain of them arechartered by the Federal Home Loan Bank Board, a Government agency.The Board also maintains the Federal Home Loan Bank System, offering,among other things, a nationwide reservoir of low-interest credit (allsavings and loan associations, whether federally or State chartered, savings banks, cooperative banks, and insurance companies, may becomemembers). Finally the Board supervises the Federal Savings and LoanInsurance Corporation (itself a federally chartered and operated institution), which offers to eligible associations the invaluable advantageof Federal insurance of share accounts.

The Federal Government plays an equally substantial role in thearea of commercial banks which, although engaged in many other kindsof activities, are responsible for a significant portion of all home financinghi the country. Through the Office of the Comptroller of the Currency,the Federal Government offers Federal charters to national banks.Through the Board of Governors of the Federal Reserve System, it offersthe advantages of membership in the Federal Reserve System to allqualified banks, whether federally or State chartered. And through theFederal Deposit Insurance Corporation, deposit insurance is offered toall qualified banks. 11

All of these financial institutions, privately owned and operated for\

private profit, are influenced in varying degrees by Federal authority.JFederal savings and loan associations and national banks are Federalcreations. Associations and banks that are members of the FederalHome Loan Bank System or the Federal Reserve System participate in

a nationwide, governmentally controlled banking system. The growthand success of federally insured institutions are in large part attributableto the confidence which Federal insurance of share accounts and depositshas instilled in the public. The Federal Government is indispensableto many of these institutions; it is important to all. All are regulated,supervised, and examined by agencies of the Federal Government. Atthe end of 1960 they held $100.3 billion in nonfarm residentialmortgage loans. Table i shows the amount of mortgage loans held byeach category of financial institutions.

The Commission has found evidence of racially discriminatory prac- .tices by mortgage lending institutions throughout the country. In De-29

TABLE i.2014 Nonfarm residential mortgages held by federally supervised financialinstitutions^ 1960 Amount (in

Number billions) Federal savings and loan associations i, 873 $32. 3FSLIC-insured savings and loan associations.... 45098 56.8Member savings and loan associations 1 4, 694 58. 5

National banks 4,537 11.4Member banks 6, 174 16.2FDIG insured banks 2 8 13, 451 * 41. 8

1 Includes all Federal savings and loan associations and all FSLIC-insured associations.

a Includes all national banks and all State member banks of the Federal Reserve System.

8 Includes 13,126 insured commercial banks and 325 insured mutual savings banks.

4 $20.3 billion held by insured commercial banks and $21.5 billion held by insuredmutual savings banks.

Source: Figures obtained from respective agencies.

troit the Commission heard of the "common policy of refusing to lendto Negroes who are the first purchasers in a white neighborhood." 12 In

Dayton the great majority of lending institutions are reported to want 30or 40 percent Negro occupancy in a neighborhood before they willfinance the purchase of a home for a Negro. 13 In Cleveland lendingpolicies were said to vary with institutional marketing areas; West Sidecompanies, for example, will lend to Negroes who wish to buy on theEast Side, while the East Side banks refuse loans on similar property. 14

In Columbus it was reported that: "Mortgages available to [minorities]

involve short-term amortization and excessively high downpayments." "In Los Angeles, the Commission was told, "if a white person buys a homeand later wants to sell to a non-Caucasian, [and] the non-Caucasiantries to qualify for the loan, the lending institution will not approve ofthis successive non-Caucasian buyer. Now that necessitates refinancingwhich is expensive and burdensome and oftentimes impossible. So thelending institution tends to control certain areas in that manner." 18

Freedom of choice is often denied to whites as well as nonwhites.

In San Francisco, the Commission was told, white persons desiring topurchase a home in an integrated neighborhood experience great difficulties in securing financing. 17 The representative of a leading mortgagelending institution told one family that one such neighborhood in thePalo Alto area was "blacked out" and that no loans would be...