Mellon Seminar: Brent Cebul

Mortgaging Out: FHA Credit Policy, Segregated Rental Housing,and the Remaking of Metropolitan America

This article explores how Federal Housing Administration (FHA) credit policies shaped the distribution of affordable rental housing from the 1940s to the 1960s. Beyond its well documented practices of home mortgage redlining, we show that the FHA decisively influenced choices about where private builders located new apartment complexes, the building designs and architectural styles they utilized, the level of rents they charged, and which tenants had access tothe apartments. In these ways, FHA programs both deepened racial segregation and dramatically transformed the landscape of rental housing in metropolitan America. 

Our discussion focuses on a 1954 congressional investigation that exposed the wide-ranging impacts of FHA credit policies. Faced with a dire housing shortage during World War II, the FHA created a new “war housing” program, which offered generous insurance terms for new apartment complexes. But the program opened the floodgates to builders who made outsized profits by inflating land values and marking up construction costs, and at times even bribing FHA underwriters for higher appraisals. When their actual costs came in lower than inflated estimates, builders could pocket the leftover mortgage funds. Among real estate operatives, this process was known as “mortgaging out,” and it became a lucrative source of publicly underwritten profits. Using a comprehensive database of every FHA-insured apartment complex nationwide and a companion GIS mapping project, we show that the FHA incentivizes builders’ choice to locate apartments in peripheral urban areas or new suburbs, where land costs were cheaper than dense urban centers. FHA rental programs thus played an important role in the abandonment of city centers and migration to the suburbs. Our mapping analysis also shows that nearly all of these FHA-insured apartments were located in predominantly white neighborhoods, thus contributing to deepening patterns of segregation and spatial inequality. 

Once the profiteering came to light in the summer of 1954, Congress held an explosive set of hearings. Lawmakers subpoenaed prominent builders like Fred C. Trump and William J. Levitt, and their testimony revealed how the surge of construction produced “windfall profits.” Meanwhile, lawmakers also turned their attention to substandard urban housing. That same summer, Congress created another program to incentivize the construction of rental housing for residents displaced by urban renewal. In order to prevent future mortgaging out scandals, lawmakers instituted cost certifications that made it more difficult for builders to profit throughurban renewal housing. In response, builders returned to the easier profits and simpler regulations of building single-family suburban developments closed to renters of color.

For all the recent scholarship on redlining, we still lack a full accounting of FHA rental programs. As we show, the FHA played an unheralded role in shaping the location, design, price, and tenant composition of rental housing. Above all, this article shows that the overdevelopment of suburbs and the underdevelopment of cities must be understood, in part, as the result of how real estate operatives perceived their ability to profit across a range of FHA programs.