Learning from the past: How to remake the secondary mortgage market

The American dream of homeownership did not magically emerge after World War II from some invisible hand of the market.  The readily available, low downpayment, thirty-year mortgage that flooded the market with credit in the 40s and 50s was the result of a series of government policies, including those that created the “secondary mortgage market.”  This new market began with the extension of government backed mortgage credit through the Federal Home Loan Bank Board (1932) and federal insurance of long term amortized mortgages by the Federal Housing Administration (FHA, 1934).  To enable the rapid growth of this new market, the federal government created the Federal National Mortgage Association (“Fannie Mae,” 1938) a government-sponsored enterprise (“GSE”)  that bought mortgages from local banks and later packaged and resold them as government-backed securities, thus permitting mortgage lending on a scale previously unimaginable (the other major GSE, the Federal Home Loan Mortgage Corporation (Freddie Mac) was established in 1970 – both Fannie Mae and Freddie Mac are currently in receivership.

In the wake of the foreclosure crisis, the “GSEs” have emerged from obscurity and are now at the center of public debate over the future direction of our housing finance system.  But what is less well known about the GSEs is their direct role in the exclusion of people of color from full participation in the homeownership market, and in the racial segregation of American metropolitan areas.

In 2004, our organization sponsored a study that examined the government’s role in creating the financial mechanisms that made the postwar housing boom possible, and the aggressive efforts that government officials took to deny responsibility for the racial impacts of their actions. In “Democracy’s Unfinished Business: Federal Policy and the Search for Fair Housing, 1961-68,” Professor David Freund found that, starting in the 1930s, “the state created and sustained conditions in the home finance market—both its government-insured and conventional sectors—that spurred homebuilding, created jobs, created demand, and ultimately introduced substantial equity into the portfolios of some families, but not others.”

The FHA, in particular, enforced segregation through its underwriting manual and rules that systematically denied mortgage credit to non-whites and women. But it was not just the well-documented, explicit segregative practices of the Federal Housing Administration (FHA) that fed suburban flight and exclusion – but rather the whole panoply of federal financial investment and insurance that supported the booming, increasingly segregated single family housing market. This market-driving government support included the FHLBB and Fannie Mae, and was also abetted by the Federal Savings and Loan Insurance Corporation (FSLIC), the Veteran’s Administration, and HUD’s various predecessor agencies – yet federal officials vigorously insisted that private market forces, not federal policy, were driving metropolitan development and segregation:

By the mid-1960′s, three decades of federal involvement had sustained a racially exclusive market for housing credit, while strenuously denying that government involvement decisively shaped suburban development or that discrimination against nonwhites within that market was motivated by race.
(Freund, Colored Property, at 179)

Today’s debate over how to remake the secondary mortgage market is well underway, and a key challenge for policymakers should be how to construct a system that does not repeat the mistakes of the past – not just the mistakes of the recent past (the toxic loan products and practices that led to the foreclosure crisis) but also the mistakes of the deeper past – a system that excluded borrowers of color and encouraged racial segregation in our metro areas. This is not a hypothetical concern – some of the policy suggestions being discussed (like the recent “qualified residential mortgage” proposal) would effectively cut many qualified borrowers of color out of the single family home market. In looking ahead, we need to remember that the government assumed comparable mortgage risk in the 1930s-1960s, but for whites. We also need to understand that government market interventions are not segregation-neutral. Even though “explicit” racial segregation is no longer part of the secondary mortgage market system, without affirmative incentives that take into account the discriminatory structures of the current housing market, any new housing finance system is also likely to perpetuate segregation and exclude qualified borrowers of color from access to mortgage credit.

Phil Tegeler is the Executive Director of the Poverty & Race Research Action Council, a civil rights policy organization based in Washington, DC. Some of the themes in this essay have been advanced in greater detail in a recent policy statement from a broad civil rights coalition that is seeking to influence the debate over the future of the GSEs.

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For further reading:

David Freund, Colored Property: State Policy and White Racial Politics in Suburban America (University of Chicago Press, 2007)

 

Kevin Kruse and Thomas Sugrue, eds., The New Suburban History (University of Chicago Press, 2006)

Douglas Massey and Nancy Denton.  American Apartheid: Segregation and the Making of the Underclass (Harvard University Press, 1993)

 

Philip Tegeler and Henry Korman, “Affirmatively Furthering Fair Housing andSecondary Mortgage Market Reform: Making the Connection” (PRRAC, 2011)

 

Housing and School Segregation: Government Culpability, Government Remedies. (PRRAC, 2004)