The National Housing Act of 1934, which created the Federal Housing Administration (FHA) in response to the Great Depression of the late 1920s and early 1930s, was a direct response to the banking crises and failures of the late 1920s that resulted in drastic fall in home loans and ownership. To help reverse the plummeting housing market at a time of massive job losses and unemployment, foreclosures, and overall economic depression, the new FHA sought to boost the market for single-family homes. The FHA employed a new chief economist, Homer Hoyt, whose (1934) dissertation entitled “One Hundred Years of Land Values in Chicago: The Relationship of the Growth of Chicago to the Rise of Its Land Values, 1830–1933,” ranked various races and nationalities by order of “desirability.” Hoyt ranked Anglo-Saxons and Northern Europeans, including English, German, Scots, Irish, and Scandinavians as the most desired racial stock, followed by Northern Italians, Czechs, Polish, Lithuanians, Greeks, “Russian Jews of the lower class,” South Italians, and “Negroes and Mexicans” as the lowest class. Read more...
As the FHA sought to improve the accuracy of its real-estate appraisal to enable its affiliate agency, the Home Owners’ Loan Corporation (HOLC), to standardize their mortgage lending process, avoid undue risky lending, and bail out homeowners, Hoyt’s racial hierarchies became a crucial tool. With Hoyt’s framework, the HOLC created racial maps of American cities and assigned risk levels to each neighborhood. Predominantly European American neighborhoods were ranked the most desirable and lowest risk for mortgage lending, designated as green on the map. Blue areas were also European American neighborhoods but inhabited by Jewish, Irish, and Italian Americans, and was considered stable and upwardly mobile, thus representing a relatively lower risk. Neighborhoods with predominantly working-class Whites were designated Yellow and represented slightly higher lending risk and therefore, less desirable than the green and blue areas. African American and Mexican American neighborhoods were marked as “Red” areas with the highest risk. This ranking had regard for wealth, class, education, and other measures of credit worthiness. This process has come to be dubbed “Redlining."
At a time when racial segregation was still sanctioned by law, African Americans and Mexican Americans, who already lived in segregated neighborhoods, were further marginalized by denying them access to mortgage loans provided to European Americans who eventually moved out of the cities to establish new suburbs. The eventual Brown v. Board (1954) decision that struck down de jure racial segregation hastened this process by encouraging more European Americans to migrate to the suburbs, a process that quickly impoverished urban centers as the tax base of inner cities were depleted by "white flight." For about half a century, redlining contributed to a widening gap between an affluent suburban America and impoverished inner cities.
It took the Fair Housing Act, part of Title VIII of the Civil Rights Act of 1968 and the Equal Credit Opportunity Act (1974) for the government to push back on redlining as a legitimate practice. Further, the Community Reinvestment Act (CRA) of 1977 has also been co-opted as an enforcement tool to encourage banks to embark on fair lending practices and to increase lending to underserved and marginalized segments of the local economies and population. As reports show, redlining continued well past this date; their impact remains evident in the wealth gaps between America’s segregated inner city and suburban communities.