Colbeck Capital Management Examines the Inequitable Evolution of Mortgages

Homeownership has been a hallmark of the middle classes for longer than most can remember. But with soaring pricing, limited inventory, and competitive bidding, many Millennials are finding themselves outnumbered and outclassed when it comes to trying to find housing in modern times. By and far, this is not the first group to come up against limitations to their ability to borrow or buy into real estate. Colbeck Capital news coverage from their blog focused on American mortgage, this now commonplace institution has had a rocky past coupled with tumultuous responses to the times.

Unsurprisingly, mortgages and mortgage credit have rarely been distributed equitably among all potential homeowners. Leading up to the 1930s, mortgages were largely a localized affair. The majority of loans were secured by soaring down payments of at least half the cost of the home, if not more. This led to even less impressive home ownership rates, with only 48 percent of homes owned by their residents in 1890. On top of high upfront costs, Americans were also charged with finding more than one line of credit to cover the rest of their home expenses, often taking out two to three mortgages to compensate. These were issued primarily by local and small-time lenders and even individuals who believed in shorter terms and higher interest rates.

The situation was not helped in the least by the onset of the Great Depression. Even those who could afford their monthly payments were stymied by bank and lender requests to repay the full value of their loans, something that most Americans did not have the free capital to be able to do. The result was the default of close to half of all mortgages in the country by 1934. And the damage was not limited to residential properties. More than a third of all farms were found to be in foreclosure for similar reasons at the same time.

In response to what quickly and clearly became a housing and lending crisis, Congress attempted to bring calm and sense to the situation. This took the form of new agencies that would not only provide mortgages but also limit interest rates to keep things manageable for all involved. As part of this restructuring, the Federal Housing Administration, or FHA, was born, and along with it came a series of new wave requirements for lending. Down payments were reduced from the exorbitant 50-60% from decades before to more manageable fees near 15-20 percent. The FHA also introduced insurance for loans up to an eventual 97 percent. The result was less surprising for everyone involved in the mortgage loan process, from lenders to borrowers.

Yet these regulations did little to bring equity to an already segregated housing market. The changes were designed to protect and empower the middle classes within a narrow definition, making it difficult if not impossible for individuals from certain backgrounds to secure a mortgage. The FHA and other issued language from Congress specifically called on lenders to deny or use discretion based on a new set of characteristics, now that the threshold for lending was more attainable. The FHA’s own Underwriting Manual, released in 1936, clearly encouraged exclusion of certain racial groups and minorities. Groups such as Italians, blacks, and Jews were considered less savory for housing values and encouraging segregationist lending practices that created equally segregated neighborhoods. While these practices were officially redacted in 1948 via the Supreme Court, they continued to be observed by lenders across the country.

Also outclassed from the mortgage process were women, who were looked down on as inferior borrowers compared to men due to their propensity to have children. Viewed as unreliable and credit risks, women had to go to great lengths to convince lenders to extend them credit, often being forced to divulge sensitive and personal health information to justify their position. It wasn’t until the 1970s that these lending practices were revisited as unjust.

In the face of these discriminatory and judgmental lending practices, more regulation and alternative measures of credit viability were needed. Turmoil in the markets was not to be a thing of the past, and a regulated system driven by the federal government was needed in order to stabilize lending. New methods, including the Fair Isaac Corporation’s FICO score, would arrive on the scene to help calculate credit with less bias. Of course, FICO cannot account for rising housing prices, rates, or shortages in real viable estate that continue to plague borrowers even today. More analysis can be found on Colbeck Capital’s profile.