The Federal Housing Authority
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, 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), to provide loans to new homeowners. 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 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.”
To the FHA, a new or emergent subdivision offered the best 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 the subdivision meeting the FHA standards in the first place. 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 Process
When an FHA agent was sent to assess a neighborhood, he took with him a scoresheet, which listed eight features. Each feature could be assigned "Reject," or otherwise be given a score of 1-5, with 5 being the highest.Stability, the all-important goal, was largely defined throughout the manual by the absence of “adverse influences.” Almost without exception, adverse influences refers to the presence or proximity of non-White races, and appraisers were advise to “investigate areas surrounding the location to determine whether or not incompatible racial and social groups are present, to the end that an intelligent prediction may be made regarding the possibility or 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 leads to instability and a reduction in values.”
While the FHA Underwriting Manual gives weight to the presence of natural barriers (highways, embankments, ravines, college campuses, and so forth) or zoning restrictions to protect the subdivision from being “invaded,” they make it clear that “[D]eed restrictions are apt to prove more effective than a zoning ordinance in providing protection from adverse influences… where these restrictions relate to types of structures, use to which improvements may be put, and racial occupancy, a favorable condition is apt to exist.”
Cheviot Knolls was a location whose natural geography and surrounding neighborhoods offered some protection from “adverse influences.”