Why Isn’t The Black Homeownership Rate Higher Today Than When The 1968 Fair Housing Act Became Law?

I was shocked to find out that the U.S. black homeownership rate isn’t any higher today than when the 1968 Fair Housing Act became law but, somehow, the U.S. black homeownership rate had increased 20% from 1950 to 1970 before housing discrimination was outlawed. That’s a stunning paradox.

Here are some possible explanations for part of the paradox, why the U.S. black homeownership rate isn’t any higher today than when the 1968 Fair Housing Act became law.

The 1968 Fair Housing Act was the last major civil rights legislation of the 1960s and probably the most contentious. It outlawed housing discrimination based on race, color, religion, and national origin. For a significant number of northern whites who supported other civil rights legislation, the Fair Housing Act hit too close to home. President Johnson’s top domestic aide, Joseph Califano, said, “We got the worst, nastiest mail we got on any piece of legislation on the Fair Housing Act.”

Therefore, in a political compromise to get it passed, the Fair Housing Act did not have strong enforcement powers.

Immediately after the Fair Housing Act, however, political efforts shifted to creating brand new federal mortgage programs targeting lower-income, urban blacks.

Just four months after the Fair Housing Act was signed into law, the Housing and Urban Development Act of 1968 was signed into law. It included the soon to be infamous Section 235 program from FHA that let lower-income people who couldn’t qualify for other mortgages get these new subsidized mortgages with down payments as low as $200 and subsidized, below-market interest rates as low as 1%.

High Hopes

Subsidized mortgages sounded like a great way to increase homeownership. President Johnson thought so. He said when signing the 1968 HUD Act into law, “this legislation can be the Magna Carta to liberate our cities” and he specifically mentioned the $200 down payment mortgage program. (Although, in the same speech he also called large-scale urban renewal a milestone of our progress.)

After the Fair Housing Act became law, instead of aggressively enforcing it and making sure blacks had equal access to the same mortgages that helped the white homeownership rate get so high, they created the new Section 235 mortgage program.

A later HUD secretary, George Romney, said of the program, “FHA personnel were encouraged to begin to do what they had not been doing; namely, to put families into homeownership situations in the central city in areas that had previously been redlined.”

The Nightmare

The new subsidized mortgage program was filled with fraud and abuse from real estate investors, real estate agents, appraisers and FHA employees. Neighborhoods in several cities ended up with blocks of foreclosed, vacant, boarded-up, FHA-owned houses.

In one related program in Detroit, by 1972, FHA had foreclosed on 35% of the mortgages they had made in 1968.

Despite President Johnson’s high hopes, the Section 235 program became a huge national scandal in the late 1960s and early 1970s. The program ended up being disgraced but many black neighborhoods in several large cities were left far worse off.

In a way, the program was unintentional, reverse redlining. Instead of excluding urban black neighborhoods from FHA’s normal mortgages like in the redlining of the 1930s, 1940s and 1950s, the 1968 FHA Section 235 program targeted lower-income, urban black neighborhoods for these new, and what turned out to be extremely high-foreclosure FHA mortgages.

FHA mortgage lending standards which had been falling from the mid-1950s bottomed out with the Section 235 mortgages in 1968. In the 1970s, the disgraced mortgage programs were cut back but FHA lending standards never got anywhere close to returning to their 1940s and 1950s homeownership boom, low-foreclosure mortgages.

Since then, from 1975 to 2013, according to Ed Pinto of the American Enterprise Institute, one in eight FHA homebuyers was foreclosed on, and “The FHA program has a national default rate 3 to 4 times the conventional market, and in many urban neighborhoods it routinely exceeds 10 times.”

FHA Foreclosure Rate of 12.5%

Perhaps the 20% down payment requirement from 1934 to 1956 gave those FHA mortgages an unnecessarily large margin of safety but the margin of safety on these 1975 to 2013 FHA mortgages was obviously too small so they had very high foreclosure rates.

Homeownership isn’t a wealth building tool when you get foreclosed on and lose everything you put into the house.

BTW, if a private mortgage company had a 12% foreclosure rate, would you call that predatory lending?

What Happened?

Why isn’t the black homeownership rate any higher today than 50 years ago? Here are some likely factors.

Incredibly Inelastic Supply. The supply of houses in the U.S. increases more slowly than the supply of gold in the world. (And, unlike gold, you can’t ship houses around to wherever the demand is greatest.)

Houses aren’t like anything else you’ll buy. The supply of houses doesn’t increase much in a year regardless of how much house prices increase that year. That means, when you subsidize buying houses and more people buy houses, house prices can increase a surprisingly large amount and that ends up making houses less affordable, even if that’s the exact opposite of what you intended.

Over-Stretched Homeowners. FHA let’s people with a given income get larger mortgages than traditional, non-government supported mortgages. That is, FHA lets people become more house-poor so they’re less able to keep up their houses when they’re hit by unexpected, expensive repairs. Neighborhoods with a lot of financially over-stretched homeowners, naturally, aren’t kept up as well.

Percent of Mortgages With Debt-to-Income Ratios Above 43%

High-Foreclosure Neighborhoods. High-foreclosure mortgages don’t have much impact on your neighborhood if your neighborhood only has a few of them but if your neighborhood has a lot of them — whether from FHA or other lenders — high-foreclosure mortgages can be devastating.

Not only are foreclosures devastating for the families, if a neighborhood ends up with a lot of foreclosures, they hurt every homeowner in the neighborhood whether they have a high-foreclosure mortgage or not, and even if they own their homes free and clear.

A high concentration of high-foreclosure mortgages in a neighborhood means more vacant, abandoned, neglected and foreclosed homes, and during real estate downturns, it means a lot more foreclosures.

Super Slo-Mo Feedback Loop. Be aware of another confusing thing about the relationship between house prices and mortgage lending standards. When house prices rise for any reason, foreclosures will fall for all mortgages, even for high-foreclosure mortgages.

When mortgage lending standards are lowered, it can, in and of itself, raise house prices which can lower foreclosures, which can make lenders think they can safely lower lending standards even more, which can increase house prices even more, and so on. While the lending standards are slowly ratcheting down over the years, the size of the next real estate bust is slowly ratcheting up.

Sometimes things happen so fast they’re hard to see. With real estate, sometimes things happen so slow they’re hard to see.

The Future

Although their foreclosure rate wasn’t as high as on their 1968 Section 235 mortgages, I think high-foreclosure mortgages from FHA and later from other lenders like Fannie Mae, Freddie Mac and private mortgage companies help explain the Black Homeownership Paradox and why the black homeownership rate isn’t any higher today than 50 years ago.

It looks to me like unintentional reverse redlining since 1968 may have done something that intentional redlining and legal discrimination in the 1950s couldn’t do, it stopped American blacks from increasing their homeownership rate.

Whatever the causes, I think the black homeownership rate should be phenomenally higher today. The first step to get there is to admit that what we’ve been doing the last 50 years isn’t working.

If you asked President Johnson on April 11, 1968, what he thought the U.S. black homeownership rate would be in half a century, I don’t think he would have said, “The same.”

This post first appeared on Forbes.com. To see the original, click here.