U.S Housing Mortgage Markets and Space: Some Reflections

1. U.S Housing Mortgage Markets and Space: Some Reflections Anne Shlay Professor of Sociology, Temple University Fulbright Scholar and Visiting Professor, Hebrew University ashlay@temple.edu http://astro.temple.edu/~ashlay/

2. Outline of talk • Urban Social Theory and Space • Government and U.S. Mortgage Markets: Suburban Investment, Central City Disinvestment • Community Reinvestment Movement (CRA) and the Home Mortgage Disclosure Act • Politics and Urban Social Theory

3. Focus on U.S. metropolitan patterns • Will not rely on examples in Israel • Challenge you to examine theoretical principles and determine relevance to understand Israeli metropolitan development processes • Focus on U.S. metropolitan housing markets to introduce students to housing finance mechanisms within U.S. and effects on metropolitization.

4. Urban Sociology • Urban Sociology: focus on the social and spatial organization of “community.” • Central: urban spatial structure • Urban spatial structure is the organization of people and activities across space.

5. Urban sociology seeks to explain: • mechanisms underlying these spatial pattern • consequences of patterns for socio-economic mobility (life chances). • Think of social-spatial organization as an urban opportunity structure

6. Theories of Uneven Development • Characteristic of cities, regions and world systems • Uneven investment patterns • Theories seek to explain uneven development, growth, deterioration and change across metropolitan regions

7. “New” Urban Sociology • Reaction to dominant models of urban ecology • Urban spatial structure: physical expression of natural form of human social organization • Apply ecological principles to understand human natural habitat: the city. • Urban spatial structure outcome of natural forces. • Centralization and decentralization: features of place • Invasion, succession and dynamics of neighborhood change: inevitable social forces. • Think: The Lion King

8. New Urban Sociology • Organization of elites (growth machine/growth coalition) • Not part of government, unelected. • Urban institutions: Have interests. • Role of powerful institutional decision-making on spatial patterns • Constellation of institutions with shared interests to manage urban growth patterns.

9. Political importance • Urban social-spatial patterns not inevitable • Patterns in interest of ruling elite. May not benefit public interests. Not in the public interest. • Urban patterns, such as uneven development, can be altered if underlying decisions are revealed and change. • Put human agency into urban social theory. Human agency acting within large and powerful institutions. • Asks who benefits and why: follow decision making follows the money.

10. U.S. Housing Finance System • Government response to the depression • Goal: stimulate consumption and create jobs • Create housing finance system

11. Homeowners Loan Corporation • Federal agency. Introduced long term self amortizing mortgage with equal payments over the course of the life time of the loan. • Importance: permitted people to buy housing. Only wealthy people were able to buy housing. • With a down payment and equal payments over 30 years, homeownership became more affordable.

12. Important aspect of housing finance • Loan is made based on the value of the house. This is collateral. Loan secured by the house. • Whether a good loan or a bad loan depends on whether house secures its value – i.e., stays the same or appreciates in value. • Lender doesn’t want to make the loan if the value is going to go down. • Example: lender gives you $50,000 to buy a house. House is only worth $40,000. You don’t pay back the loan and the lender gets the house and loses $10,000. • Led to development of the appraisal industry.

13. HOLC: • initiated the systematization of the appraisal industry. • Created “science” of value by grading neighborhoods. • Grades: • A (green): homogeneous (not Jewish) • B (blue): still desirable • C (yellow): definitely declining • D (red) declined (term: redlining came out of this practice of outlining neighborhoods not worthy of investment with red lines).

14. HOLC continued • Neighborhoods with small portions of black inhabitants usually rated grade four or not worth of investment. • Lenders would not make loans in grade four neighborhoods. • Almost any neighborhood with any black residents or gaining any black residents immediately were downgraded as being worth of investment.

15. Created new government institution: Federal Housing Administration • Historian Kenneth Jackson says “No agency of the United States government has had a more pervasive and powerful impact on the American people over the past half century then the Federal Housing Administration.”

16. FHA mechanics • FHA: designed to support home purchases. • Reduced the size of the necessary downpayment. Could secure a loan with less than 10% downpayment. • Federal government guaranteed the loan: in case of default, lender would get paid. • Little or no risk to lender. • FHA loans and VA loans. • Became cheaper to buy than rent.

17. What’s the problem? • The government is making homeownership affordable to lots of people who ordinarily wouldn’t be able to buy them.

18. Big problem: HOLC appraisal methods adopted by the FHA. • Determined the neighborhoods in which loans could be made. • By definition, because of the way classified “good” versus “bad” neighborhoods for investment, essentially wrote off huge portions of cities. • Only place for investment: suburbs. • Uneven development; product of racist underwriting practice of government in support of financial institutions. • So if wanted to buy a house, bought house in suburbs.

19. In the words of jon powell “Discriminatory housing policies subsidized a mass movement of white Americans to these separate municipalities (suburbs). A powerful system of institutionally racist policies subsidized and encouraged the movement of opportunities out of the central city into these developing suburbs.”

20. FHA put in place rules governing loans they would guarantee • single family homes, not multifamily • minimize regulations for lots size, set back from streets (effectively limited housing stock of almost all of Baltimore) • Stipulated neighborhood to be homogeneous by race and class. • Encouraged restrictive covenants.

21. FHA • embraced discriminatory attitudes of the market place. • Prejudice previously personalized and individualized. • FHA exhorted segregation and enshrined it as public policy.

22. Foundation for uneven development and intense suburbanization • institutional practices of government which guaranteed mortgages in suburbs but not in cities. • By definition, created falling housing values in redlined communities. • If cannot invest, price goes down • Became a self fulfilling prophecy

23. Fueled continued racist sentiment • When persons of color moved into a neighborhood, immediately classified as bad for investment. • Housing values went down. • People could not see the “classification.” • Could only see the movements of people into an out of the neighborhood. • racial change became associated with falling property values because the government would not allow new investments.

24. Institutional decisions to invest (or disinvest) • structured the rate and direction of neighborhood changes • not presumed natural forces like invasion and succession.

25. The backlash • By investing money in suburbs, FHA built the suburbs. • By not investing money in cities, FHA destroyed cities.

26. Reaction to backlash • Huge outcry about racism and FHA lending practices. • FHA changed its practices. Engaged mortgage brokers to make loans in older central city area. • Remember: no risk to the lender. Brokers operated as middle people. Made money off of brokerage fees. • Relaxed underwriting criteria. • Houses over priced. No underwriting. • African Americans defaulted. Massive repossessing of homes.

27. Final result: Kenneth Jackson • “Increased the speed with which areas went through racial transformation and victimized those it was designed to help.”… Made it easer for whites to finance their escape from areas experiencing racial change

28. Organizing against bank lending practices • Recognition by urban neighborhood leaders of link between bank decision making and the deterioration of their neighborhoods. • Call for lending disclosure. • Call for institutional accountability.

29. Question • Why should banks be accountable to communities? • What is the basis for calling for lender responsibility?

30. Answer: Lender protected for-profit institution • Lender: receives deposits • Deposits: federally insured in case of default • Government: provides federal insurance that encourages people to put savings in banks • Neighborhood deposits being taken out of neighborhood and invested in suburbs. • Not responsible lending • Accusation: Lender redlining communities

31. Greenlining and Lender Disclosure • Call for greenlining lender: put deposits in banks that are being responsible lenders • Take deposits out of disinvesting lenders. • Requires disclosure of where do lenders lend

32. Home Mortgage Disclosure Act (HMDA) 1976 • Required lenders to disclose number and dollar volume of their residential lending at census tract level. • Allowed organizations to track where lenders lend. • Initially hard copy-eventually computerized • Allowed sophisticated analysis of patterns of lending and the effects of neighborhood characteristics like race and housing type on lending volumes

33. Community Reinvestment Act (CRA) of 1977 • Lenders have an affirmative obligation to lend in a community • But how enforced? • Lenders under “CRA exams.” • Problems: regulators did not take CRA seriously. Everyone passed their exams

34. Disclosure and Lender Accountability: the 1980s • Period of intense mergers and acquisitions • Lender require regulator permission to merge/acquire or open bank branches • Critical point to object to merger or business practice based on failure to comply with CRA.

35. Used HMDA data to document the failure of lenders to comply with CRA • Loans only to suburbs • Loans only in white neighborhoods • Loans only in rich neighborhoods. • Looked for smoking gun that would get lenders to take threat seriously

36. Lender response • Negotiated with community based organizations • Set up special loan programs • Gave grants to housing counseling and community organizations • CRA agreements worth billions of dollars of investment to urban communities including low income communities and communities of color.

37. Urban Social Theory and Community Reinvestment • Could not see the presence or absence of a credit flow. Could only see the outcome of disinvestment or reinvestment. • HMDA made visible institutional decisions underlying uneven development. • Not uncontrollable social forces based on natural dispositions within human social spatial organization

38. Rather, decisions that can be altered with • good data • good research • solid organizing • theories of mechanisms underlying uneven development.

39. Community Reinvestment • Not a panacea • Other topics: • Predatory lending • Low-income homeownership

40. Urban institutional decisions • Major consequences for urban spatial patterns • Important to look at cost benefits of decisions, particularly of big projects with public backing • Who benefits from: • Transportation projects • Downtown development • Housing developments • Stadiums • Olympics

41. Uneven development • Not natural • Outcome of institutional decision making • Decision-makers not necessarily (usually not) politically accountable • Behinds the scenes • Goal of urban social research on space: make visible the decisions that underlie metropolitan spatial inequality