At a time when policy initiatives of the Reagan administration are reducing government regulations and relying increasingly on private markets, a look at how home mortgage credit was supplied in areas redlined by institutional lenders offers a historical perspective on how the market works in credit-short neighborhoods. The evidence from Chicago shows that credit was available from professional investors using land installment contracts. But the cost to black homebuyers in these neighborhoods undergoing racial change was remarkably high. Investors realized high returns from race- as well as risk-related factors. Without sacrificing the high investment return, they shifted the lending risk to financial institutions. In effect, these institutions' only recourse was the value of the mortgaged property, the element conventionally considered most uncertain in these neighborhoods. The problems of an imbalance between lending risk and return highlight the importance of the structure of lending incentives as well as the availability of credit in these neighborhoods.
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References
1.
1. President's Commission on Housing, The Report of the President's Commission on Housing (Washington, DC: Government Printing Office, 1982), p. xvi.
2.
2. C. Duncan MacRae, Margery Austin Turner, and Anthony M.J. Yezer, “Determinants of FHA Mortgage Insurance in Urban Neighborhoods,”Housing Finance Review, 1:55-71 (Jan. 1982). The President's Commission on Housing cited the continuing need for FHA to provide mortgage insurance where the private market is unable or unwilling to do so. The impact on loan volume will depend on the type of FHA program change or budget changes reducing commitments for FHA loans or for Government National Mortgage Association mortgage-backed securities.
3.
3. David McEntire, Residence and Race (Berkeley: University of California Press, 1960); Alfred Avins, ed., Open-Occupancy vs. Forced Housing Under the Fourteenth Amendment (New York: Bookmailer, 1963); U.S. Commission on Civil Rights, 1961 Report: Part IV, Housing (Washington, DC: Government Printing Office, 1961); Chicago Commission on Human Relations, Mortgage Availability for Non-Whites in the Chicago Area (Chicago: Chicago Commission on Human Relations, 1963).
4.
4. Contract Buyers League v. F & F Investment, 300 F.Supp. 210 N.D. Ill. (1969). For a discussion of the Contract Buyers League and some of the arguments involved in the litigation, see James A. McPherson, “In My Father's House There Are Many Mansions—And I'm Going to Get Me Some of Them Too,”Atlantic Monthly, 229:52-82 (Apr. 1972); Gregory L. Colvin, “Discriminatory Housing Markets, Unconscionability and Section 1988: The Contract Buyers League Case,”Yale Law Journal, 80:514-566 (1971).
5.
5. Martin J. Bailey, “Effects of Race and Other Demographic Factors on the Values of Single-Family Houses,”Land Economics, 42:215-222 (May 1966).
6.
6. John Kain and John Quigley, Housing Markets and Racial Discrimination (New York: National Bureau of Economic Research, 1975), pp. 62-82; Rose Helper, Racial Policies and Practices of Real Estate Brokers (Minneapolis: University of Minnesota Press, 1969).
7.
7. For a firsthand account of these well-known practices in Chicago, described by one of the area's most active speculators using a pseudonym, see Norris Vitcheck (as told to Alfred Balk), “Confessions of a Blockbuster,”Saturday Evening Post, 235:15-19 (14-21 July 1962).
8.
John Yinger , “Racial Transition and Public Policy,” Policy Note P78-1, Department of City and Regional Planning, Harvard University, Mar. 1978.
9.
9. The legal remedy available to the contract seller in Illinois in the event of default resulted in one of the less costly and most rapid foreclosure proceedings on LICs in most states. Because a contract buyer could be evicted through the forcible entry and detainer procedure applied in rental eviction cases, the entire process could take as little as 60 days, as compared to nearly three years for a conventional mortgage.
10.
10. See Michael A. Stegman, Housing Investment in the Inner City: The Dynamics of Decline (Cambridge: MIT Press, 1972), pp. 199-202, for a discussion of LIC activity in Baltimore.
11.
11. Otis D. Duncan and Beverly Duncan, The Negro Population of Chicago (Chicago: University of Chicago Press, 1957); Chicago Commission on Human Relations, Mortgage Availability for Non-Whites in the Chicago Area; David McEntire, Residence and Race (Berkeley: University of California Press, 1960).
12.
12. This credit premium represents the difference between the actual LIC sale price and a hypothetical sale price a seller might have been willing to accept if he sold without supplying credit. This latter cash-equivalent price was derived by summing the seller's cost of acquiring the property and the discounted value of the income stream—the difference between what the contract buyer pays to the contract seller and what he pays to the lender who granted him a mortgage on the property—he expected to receive over the life of the contract. See Lynne B. Sagalyn, “Housing on the Installment Plan: An Economic and Institutional Analysis of Contract Buying in Chicago” (Ph.D. diss., Massachusetts Institute of Technology, 1980), pp. 166-70.
13.
13. Stegman, Housing Investment in the Inner City, p. 206, makes this point, and the lending documents for the conventional loans given to contract sellers in Chicago included an appraisal statement that reaffirms it.
14.
14. John Mixon, “Installment Land Contracts: A Study of Low Income Transactions, With Proposals for Reforms and New Programs to Provide Home Ownership in the Inner City,”Houston Law Review, 7:535-554 (May 1970).
15.
15. Nearly all contract sellers conducted property transactions—acquisition, mortgage finance, LIC sale—within this legal framework, identifiable only by bank number. In addition to concealing his identity and the extent of his property holdings, the trust format allowed the investor to limit his personal or business liability, since the trust entered into all transactions and its resources were limited, generally to a single property.
16.
16. H. Robert Bartell, Jr., “An Analysis of Illinois Savings and Loan Associations Which Failed in the Period 1963-1968,” in Study of the Savings and Loan Industry, ed. Irwin Friend (Washington, DC: Government Printing Office, 1970), p. 377.
17.
17. Bartell, “An Analysis of Illinois Savings and Loan Associations,” pp. 415-417.
18.
18. Edward S. Herman, “Conflict of Interest in the Savings and Loan Industry,” in Study of the Savings and Loan Industry, pp. 833-847.
19.
19. Bartell, “An Analysis of Illinois Savings and Loan Associations,” p. 385.
20.
20. For a discussion of these changes, see P. M. Greenston, C. D. MacRae, and C. I. Pedone, “The Effects of FHA Activity in Older Urban, Declining Areas: A Review of Existing, Related Analysis,” Research Report 220-1 (Washington, DC: Urban Institute, 1975).
21.
21. “The Role of the Mortgage Banker in the FHA-Insured Single-Family Home Loan Process,” in The Role of Mortgage Lending Practices in Older Urban Neighborhoods (Evanston: Center for Urban Affairs, Northwestern, 1975), pp. 121-162.
22.
22. Susan M. Wachter, “The 1968 Congressional FHA Amendments to the National Housing Act: Their Impact on Urban Areas,” in The Urban Impacts of Federal Policies, ed. Norman J. Glickman (Baltimore: Johns Hopkins University Press, 1980), pp. 432-434.
23.
The facilitator also plays an important role in reinvestment strategies such as Neighborhood Housing Service partnerships. See Urban Systems Research and Engineering, Inc., Creating Local Partnerships: The Role of the Urban Reinvestment Task Force in Developing Neighborhood Housing Services Organizations (Washington, DC: Department of Housing and Urban Development, Mar. 1980).
