The source:“The Creation of Homeownership: How New Deal Changes in Banking Regulation Simultaneously Made Homeownership Accessible to Whites and Out of Reach for Blacks” by Adam Gordon, in The Yale Law Journal, Oct. 2005.

America’s modern love affair with real estate probably began in 1934, when Congress created the Federal Housing Administration (FHA). Even though the nation was then in the grip of the Great Depression, the number of housing starts soared, rising from 93,000 in 1933 to 619,000 in 1941.

Before the FHA, Americans needed substantial amounts of money—up to a third of the value of a home—to secure a mortgage. And what they got were, in effect, “balloon” mortgages; after five to seven years, buyers had to secure new loans or, in many cases, were forced to sell their homes.

The FHA revolutionized home finance by extending guarantees to qualified buyers, allowing them to borrow from banks at low rates for increasingly longer terms with down payments of only 10 percent. But the revolution bypassed an important group: African Amer­icans. Whites were given a generation’s head start on accumulating wealth through homeownership. Today, the median white household has 10 times as much wealth as the median black household.

The FHA, says Adam Gordon, a third-year law student and senior editor at The Yale Law Journal, established underwriting guidelines that were based on the racial makeup of a neighborhood. Areas with a greater proportion of whites, in the FHA model, were deemed to have stable, relatively high property values, while predominately black neighborhoods were assumed to have low values. This loan-granting model severely limited access to FHA mortgages for black Americans. In 1960, nonwhites held only 2.5 percent  of FHA-insured loans.

This story is well known to scholars. What’s disputed is how much difference the FHA policies actually made. If there was sufficient demand among black home buyers, some scholars argue, private mortgage insurers would have stepped in to serve those excluded by the FHA. Gordon believes he has the explanation for why this did not happen: Because private lenders adopted the same flawed FHA lending model, their discriminatory criteria “effectively became binding law.”

In November 1962, President John F. Kennedy signed an executive order directing the FHA to make its loans available regardless of “race, color, creed, or national origin.” That order, and later reforms, such as the Fair Housing Act of 1968, put blacks on nearly equal terms with whites when buying a home, but three decades of discrimination had already prevented many blacks from “becoming homeowners and building assets.”

Gordon argues that further remedies are needed. Among the options are stepped-up attacks on exclusionary zoning and “mobility grants” for blacks in the form of direct payments—in effect, reparations—or mortgage subsidies. The straightforward anti-discrimination steps taken so far fail “to adequately address . . . the past disparity in wealth building” and its conse­quences—the segregated, depressed neighborhoods “that the FHA helped create.”