We see that in the middle class in America 61% of wealth is held in real estate, or more specifically a primary residence. Now, how does the middle class buy real estate? We buy real estate using a mortgage of course. None of us have $200k under the mattress do we?
These days pretty much everybody knows that a mortgage is typically for 30 years, but it didn’t used to be like that. Until the 1930s home loans used to be for terms of 3 to 10 years, with interest paid throughout the term of the loan and the full balance of the loan coming due in full at the end of the term. These were called “straight loans.” Straight loans were typically not paid off at the end of the term, they were refinanced.
But in 1929 the great depression happened. The great depression was characterized by a total seizing of credit markets known as a “credit crunch”. A credit crunch happens when nobody wants to lend money. I won’t go into the reasons why nobody wanted to lend money back then, that’s really outside the scope of this blog (and my expertise), but suffice it to say that people couldn’t get loans for anything. This had a huge effect on home prices and the rate of home ownership. Why?
If homes are too expensive to buy with cash, and it becomes impossible to get a loan to buy or refinance a house, doesn’t it make sense that the rate of home ownership will fall as new buyers aren’t able to obtain new credit and current owners aren’t able to refinance their loans? As new buyers are priced out and current owners who can’t refinance are foreclosed on, suddenly there is no demand at all for houses – which causes the market price of homes to crater. This is obviously a huge problem.
The solution to this problem was a new-deal stroke of genius: the 15 year amortized mortgage securitized by the federal government (this later became the 30 year mortgage most people use today). Basically, the government decided that the fall in prices and the rate of home-ownership was a problem, and they decided something had to be done. Since banks didn’t want to give credit, the government formed a semi-private corporation backed by the U.S. government that would provide liquidity to credit markets (basically, the government would enter the business of extending credit to home-buyers.) This corporation was (and still is) called the Federal National Mortgage Association (FNMA), or Fannie Mae, and Fannie Mae exists to help the average American buy a home.
So, the federal government solved the problem of home-ownership for middle-class America, and started the idea of the “American Dream” in the 1930s. But this dream was one reserved for white people only. Here’s how:
Despite the egalitarian spirit of the new-deal, 1930s America was still a segregated society steeped in racism. This racism extended to the ways that people could receive credit. You see, people and communities of color were believed to be riskier investments for mortgage lenders than white people, and this racism was codified by the federal government itself. Enter the Home Owners’ Loan Corporation (HOLC) and the practice of redlining.
The HOLC was started in 1933 and existed to refinance these “straight loans” into 15 year amortized loans that borrowers could more easily pay off. This wasn’t free money though — the HOLC wanted to see most of these loans paid back. To do this they underwrote each loan, which means that somebody was responsible for doing some analysis to determine a potential borrowers likelihood of paying back the loan. To help underwriters, the HOLC published maps which illustrated a borrowers likelihood of paying back the loan. Geographic areas were graded from A to D, A being most desirable and D being least: and D typically meaning majority Black neighborhoods.
We can still look at these maps today, and they provide a lot of insight into what institutionalized racism looked like in the 1930s and the impact that it still has to this day. My company does real estate in Savannah, GA, so we’ll focus on Savannah for the rest of this article. You can check out the Savannah maps by clicking this link, or check out the screenshot below.