While it was important to help existing homeowners, there was still a large population of renters who could not even imagine owning their own home. The federal government wanted the new customers to enter the market, therefore helping to stabilize the population while making the housing construction market boom. In 1935, one year after creating the HOLC, the Federal Government established a new agency, the Federal Housing Administration (FHA). While not directly issuing loans, the FHA insured banks who made loans to provide loans to new homeowners -- in FHA approved areas. As Rothstein notes, the “FHA insured bank mortgages that covered 80 percent of purchase prices, had terms of twenty years, and were fully amortized” (Rothstein, p. 64).
As with the HOLC, the Federal Housing Administration sought to hold down risk by issuing loans where there were lower odds of default. Before a loan was approved, an FHA agent was sent to appraise the property. As a new agency, the FHA developed its own standards for assessing risk, all of which were listed in the Federal Housing Administration Underwriting Manual, which the agent carried with him when appraising a property.
While the agency may have been new, the FHA’s standards, as listed in the Underwriting Manual, grew out of the same social and racial attitudes that had shaped the HOLC. It is worth taking a closer look at elements of the assessment process, as stated in the Underwriting Manual, to get a sense of how these social and racial attitudes played an enormous role in determining which subdivisions would, or would not, get the all-important FHA approval.
The Neighborhood Assessment ProcessWhen an FHA agent was sent to assess a neighborhood's mortgage risk, he took with him a scoresheet, which listed eight features (FHA, 1001). Each feature could be assigned "Reject," or otherwise be given a score of 1-5, with 5 being the highest. The eight categories totaled 100 points, meaning that some features counted for more than others. As one would expect, the first feature, Economic Stability, is the most heavily weighted; though the 1-5 ratings do not have numerical scores assigned, as do those in the other features, Economic Stability accounts for 40 percent of the total. The Underwriting Manual explores this feature in great length, explaining how it evaluates stability and sufficiency of family incomes, stage and trend of neighborhood development, and so forth.
The second feature, Protection From Adverse Influences, is weighted for 20 percent of the total. While adverse influences, as defined in the Underwriting Manual, may consist of things such as business expansion into the neighborhood, or quality of architecture in adjacent or nearby neighborhoods, it is clear that adverse influences often refers to the presence or threat of "inharmonious racial groups." And, even when the Underwriting Manual moves on to other features, such as Adequacy of Civic, Social, and Commercial Centers, this second feature provides the language for any threats perceived there. It is worth quoting directly from the Underwriting Manual at some length to convey a sense of the FHA viewpoint in performing these assessments. The Underwriting Manual is constructed of numbered paragraphs, with selected quotes from them as follows:
Natural Physical Protection. "Natural or artificially established barriers will prove effective in protecting a neighborhood and the locations within it from adverse influences. Usually the protection from adverse influences afforded by these means includes prevention of the infiltration of business and industrial uses, lower class occupancy, and inharmonious racial groups." (FHA, 935)
Quality of Neighboring Development. "Areas surrounding a location are investigated to determine whether incompatible racial and social groups are present, for the prediction regarding the probability of the location being invaded by such groups. If a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally contributes to instability and a decline in values." (FHA, 937)
Quality and Accessibility of Schools. "The social class of the parents of children in the school will in many instances have a direct bearing. Thus, physical surroundings of a neighborhood area may be favorable and conducive to enjoyable, pleasant living in its location. However, if the children of people living in such an areas are compelled to attend school where the majority or a considerable number of the pupils represent a far lower level of society or an incompatible racial element, the neighborhood in question will prove far less stable and desirable than if this condition did not exist." (FHA, 951)
SubdivisionsWhile many types of neighborhoods were assessed, the FHA had from the outset shown a preference to insure homes in a particular type of neighborhood: the new subdivision. Section 182 of the 1936 Underwriting Manual bluntly notes that “[I[n pursuance of the objectives of the National Housing Act the Federal Housing Administration desires to insure eligible mortgages on residential properties which are created by the subdividing of parcels of real estate and the erection of new structures thereon.” (FHA, 182) By the time the Underwriting Manual was revised in 1938, the subdivision had only grown in favor. A subdivision offered an opportunity to create an ideal neighborhood – one in which the properties would hold or increase their value over time, while the same social class of residents would live there contentedly year after year, happily paying off their mortgages and FHA loans. Of course, this was predicated on ensuring it met FHA standards in the first place.
Policies for subdivisions were considered in the section immediately following those for general neighborhood assessment: Special Consideration in Rating Undeveloped Subdivisions and other Sparsely Built Areas. While many of the same considerations applied to subdivisions as to other neighborhoods, the FHA recognized that, as unfinished neighborhoods, the agent had to a certain extent "look into the future and forecast the environment that will likely be created." (FHA, 975) In making such a forecast, the agent had to pay special attention to the characteristics of the surrounding area, and how they would impact development. Chief among these, as was the case with all neighborhoods, was Protection From Adverse Influences. Paragraph 980 notes "The Valuator should realize that the need for protection from adverse influences is greater in an undeveloped or partially developed area than in any other type of neighborhood." (FHA,980)
Natural physical protection was important, of course, but the FHA considered the most important thing to be the existence of two factors: zoning regulations and effective restrictive covenants. Zoning, whereby only certain types and sizes of buildings were allowed in a neighborhood (and thus be protected from other types), offered some degree of protection "because they not only exercise control over the subject property, but also over the surrounding area."(FHA, 980-2). the paragraph notes, however that "they are seldom complete enough within themselves to assure a homogeneous and harmonious neighborhood.
To the FHA, the key factor in protecting a neighborhood was the presence of restrictive covenants. Covenants could impose very specific restrictions that strengthened zoning regulations, placing strict rules on buildings, their use and look, and virtually every other aspect of the neighborhoods character. They also allowed the neighborhood to determine who could live there and, more importantly, who could not. In their list of the eight recommended restrictions that should be present in Declaration of Covenants, listed a-h, one should take special note of restriction g: "(P)rohibition of the occupancy of properties except by the race for which they are intended." (FHA, 980-3).
This, then, is the world that the Francis land Company and Walter Leimert entered when they sought to develop Tract 11556 as Cheviot Knolls. Few things could be more important to subdivision developers than to get FHA approval, as it meant that potential homeowners could get loans at favorable terms. As the HOLC map and Area Description points out, Cheviot Knolls was surrounded by tracts that all had achieved the desired green, or most favorable, rating on the map. Likewise, Tract 11556 had hills, major roads, and freeways nearby, also offering protection. So the threat of "adverse influences" from the surrounding areas was small. As the Francis land Company and Leimert began preparing Tract 11556 itself, their primary task was to make sure that they could guarantee Cheviot Knolls' favorable status, "in perpetuity."
For that they would have to create the strongest possible Statement of Covenants and Restrictions.