The HOLC and the FHA
The core pieces of legislation that make up current American housing policy began in the New Deal era. The wreckage wrought by the Great Depression led to widespread poverty and foreclosures. The moment was right for major steps to alleviate suffering. President Franklin Delano Roosevelt entered office on a tide of Democratic power, spawned by widespread agreement that the Hoover administration was to blame for the regulatory mistakes which caused the Depression. In 1933, the Home Owners Loan Corporation (HOLC) was established to bail out defaulting home buyers by trading government bonds for delinquent mortgages.
The HOLC was accompanied by a set of federal agencies which were created to stimulate the housing market, the foremost of which was the Federal Housing Administration (FHA). Created in 1934, the FHA provides mortgage insurance for loans that adhere to an established set of requirements, effectively protecting against default, encouraging longer terms, larger sums of money, lower interest rates, and stricter construction standards. The FHA joined and was bolstered by the mortgage interest deduction, or the MID, which came into being in 1913, not to spur homeownership but as part of a general policy allowing businesses to deduct interest payments from loans.
With the introduction of “mass tax” in the mid-1930s, the MID began to make an enormous impact. Joined by the HOLC and the FHA, it allowed homeowners to deduct vast amounts of money from their taxed income—money that they were pouring into expensive new mortgages. Without federal insurance, it would make little financial sense for banks to offer loans on such a scale because of the high costs of developing and maintaining housing. Additionally, the MID allowed homeowners to accumulate vast amounts of equity on their homes over the 25 years or so that they committed to pay off their mortgage. Moreover, homeowners could refinance their mortgage to extract equity to finance further purchases, thus operating as a forced savings mechanism that accelerated wealth at unprecedented rates.
When speaking of “generational wealth” in this country, the MID is the key mechanism at work. However, the benefits of the three-pronged support provided by the MID, the FHA, and the HOLC were not enjoyed by everyone. Numerous historians have documented the myriad ways in which a combination of FHA policy (which has come to be known as “redlining”) and localized racism excluded Black Americans from good mortgages in up and coming neighborhoods. Under the ostensibly profit-driven justification that Black Americans were uniformly at “higher risk of default,” the FHA maintained mortgage underwriting standards that described “the infiltration of inharmonious racial or nationality groups” as a central factor in creating unstable neighborhoods.
The MID is currently by far the largest government subsidy directed at homeowners. It is also highly popular and enjoys support from a wide constituency, particularly business class elites and people who hold political sway. This is not surprising, as the subsidy applies only to homeowners who itemize their deductions, which is primarily middle- and high-income households; thus, rich families accrue the majority of the subsidy. Many advocates for the MID argue that it encourages homeownership, which has been shown to have numerous positive “spillover effects” through its creation of stable neighborhoods of consistent socioeconomic status.
G.I. Bill
As the MID and FHA programs began to gain traction with the American public, a second major policy initiative developed in Congress. The G.I. Bill of 1948 welcomed World War II veterans home from war with a sweetened version of the mortgage subsidy offered to other Americans. There was widespread consensus among policymakers that veterans returning home should receive political priority. The American Legion, a conservative and patriotic organization, introduced a set of proposals to Congress which included medical care, unemployment insurance, four-year college education, furlough pay, and home, and farm mortgages.
Once passed, the G.I. Bill enabled lengthy mortgages with even smaller interest rates and no down payments. The program ultimately fell under the jurisdiction of the Veterans Administration (VA), which, with veterans’ interests in mind, instituted broad safety nets for default and foreclosure. Each year from 1950 to 1960, an average of 200,000 first time homebuyers were financed through the GI bill, which exceeded the number financed by the booming FHA program. The GI bill helped to create a stable and well-housed middle class, primarily located in suburbs and in urban neighborhoods composed of predominantly single-family homes. The policies were also friendly to banks and developers who were able to proceed with reckless abandon—buoyed by the sturdy backing of the federal policies. Absent a racial lens, the GI bill registers as a resounding note of success. However, recent attention has been given to racially discriminatory policies in the bill. Black Americans returning home from Europe were systematically denied entrance into the mortgage program—a move which is often contextualized as a necessary compromise with stingy Southern Democrats in Congress. While operating to improve the quality of life for many Americans, the GI Bill further expanded the gap between White and Black Americans by denying Black Americans a valuable wealth building tool.
