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Housing Discrimination as a Basis for Black Reparations Jonathan Kaplan, Department of Philosophy (from a paper co-authored by Andrew Valls) Oregon State University Oct. 21, 2006. Reparations and Slavery:. Problems for the argument: The “Epistemological Fog” “Long time ago”

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Housing Discrimination as a Basis for Black Reparations

Jonathan Kaplan, Department of Philosophy

(from a paper co-authored by Andrew Valls)

Oregon State University Oct. 21, 2006


Reparations and Slavery:

  • Problems for the argument:
  • The “Epistemological Fog”
    • “Long time ago”
    • Who (today) deserves reparations? How can we find out?
    • Who (today) owes reparations? Who benefited? How much?
  • Problems with the Counterfactual: In the absence of this harm…
    • Non-existence problem (the people owed reparations wouldn’t exist)
    • Counterfactual values too hard to calculate

These problems are not fatal to a reparations scheme based on the harms inflicted by slavery; however, they make defending such schemes more difficult.


Why Housing?

  • The harms inflicted by actively racist Government policies are of relatively recent origin (1934 – at least the 1950s)
  • The harms inflicted by the Government’s unwillingness to enforce laws against housing discrimination are recent and ongoing (1950s - present!)
  • Many of the people harmed by actively racist government enforced policies are still alive today (and/or have immediate family members who are still alive)
  • The harms are calculable – housing equity and costs can be easily discovered, etc.
  • The harms are sizable – while these are by no means the only harms that should be addressed, addressing these harms would be significant.



The “Wealth Gap”


Equity in Owner Occupied Housing is most of the wealth for most Americans with any wealth (those in the middle 60% of wealth)…

The Black/White wealth gap in the U.S. is in large part explained by the differences in home ownership rates and the value of owner-occupied housing

These differences in home ownership rates and the value of owner occupied housing exist at every income level, and persist when controlling for all standard demographic variables.

Why is this?


The U.S. and Home Ownership:

Until the creation of the “Home Owner’s Loan Corporation” (HOLC) in 1933, and the “Federal Housing Authority” (FHA) in 1934, relatively few Americans owned their homes.


  • Maximum Loan to Value Ratios: Less than 50%
  • Maximum Term for Loans: about 5 years (the loans ended with large “balloon payments”)

Homes were seen as an expensive consumable good, not as an investment or way to build equity.

The HOLC and FHA changed all that.


What changed? 1930s-1940s

  • HOLC and the FHA were exempt from laws regarding maximum LTVR and terms
    • 20% down-payments (down to 0% for VA loans)
    • 20-30 year terms
  • They created the first “self-amatorizing” real-estate loans.
  • Federally insured mortgages lowered risks for both homebuyers and lenders
  • In 1938, the creation of the Federal National Mortgage Association (“Fannie May”) provided a market for FHA (and, later, VA) loans, increasing liquidity and further decreasing lender risk

Why didn’t Black American’s Benefit?

At the beginning of the 20th century, most Black Americans living in cities lived in neighborhoods that were predominantly White (the “segregation index” was relatively low for most American cities, especially in North)

The “Home Owner’s Loan Corporation” (HOLC) assigned “risk” rating to neighborhoods, based on various demographic factors, including especially race (‘mixed’ and predominantly Black neighborhoods were rated as “riskier”)

But the HOLC was willing to insure mortgages in “high risk” neighborhoods, at roughly the same costs; the “risk” ratings were meant (it seems) for internal actuarial use.

And during its short existence, the HOLC found that “high risk” neighborhoods did not have substantially higher rates of default (were not in fact “riskier).

The FHA changed all that …


FHA: Racism open and covert

  • The FHA decided to use the “neighborhood risk” ratings as a guide to what mortgages would and would not be insured.
    • Best: white non-immigrant neighborhoods
    • Worst: predominantly Black neighborhoods (“uninsurable”)
  • Additional FHA Risk Criteria: “relative economic stability” and “protection from adverse influences”
  • And “if a neighborhood is to retain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes,” FHA Underwriting Manual

Upshot: To be insurable, the neighborhood had to start White and stay White.


For the FHA, to be insurable, the neighborhood had to start White and stay White.

  • This excluded most existing housing in cities (because the neighborhoods were generally already “mixed”), and hence encouraged suburbanization…
  • But just to make sure, the FHA decided that “stand alone” housing was to be preferred over “mixed use” housing, further limiting urban housing options
  • To make sure that neighborhoods started White and stayed White, the FHA actively promoted the use of racial covenants to protect against transitions to mixed neighborhoods
  • Perhaps 80% of new suburban housing developments in the 30’s and 40’s included such covenants….
  • These were not held to unenforceable until the 1948 U.S. Supreme Court decision Shelley v. Kraemer

Post-Shelly Housing Racism...

Shelley v. Kraemer made racially restrictive covenants illegal and unenforceable, but by itself this did little to increase the access that Black Americans had to home purchases.

Steering and “individual” discrimination remained common, and, until 1968, was in fact legal.

The FHA would still not insure mortgages on homes in “mixed” neighborhoods on an equal footing with “White” neighborhoods, and hence White homeowners (even if not themselves racist) in White neighborhoods had an incentive to prevent Blacks from purchasing homes.

Even after the passage of the Fair Housing Act (Title VIII of the Civil Rights Act of 1968), there was little government interest in enforcing the weak antidiscrimination rules it enacted…



part one

  • 1) Blacks couldn’t buy houses using FHA / VA loans:
    • Since FHA/VA loans were the only loans legally exempt from Loan-to-Value ratio caps and maximum term limits, this meant that Blacks were ineligible for the only affordable loans, and the only loans useful for building equity in owner-occupied housing.
  • 2) Black home-owners didn’t benefit from the rise in house prices caused by FHA/VA programs:
    • Areas where Blacks owned homes didn’t benefit from increased house prices driven by FHA-insured loans, because such loans were unavailable for purchasing property in “mixed” neighborhoods.


  • White Americans gained access to equity-building home ownership.
  • Black Americans were systematically denied such access, by the same governmental agencies that made such access possible for White Americans.

White Americans therefore had an opportunity to build wealth that Black Americans were prevented from having…



part two

The Ghettoization of American Cities

Whites, to take advantage of FHA/VA loans, were essentially forced to move to new suburban developments with restrictive racial covenants.

Blacks were excluded from the equity gains associated with the rise in home ownership in the 1930s-1960s, and were excluded from suburbanization.

“Mixed” neighborhoods in American cities became predominantly Black, and services were then systematically withdrawn from American cities…



part three

Residential Segregation and the disadvantages wrought by FHA/VA/HUD policies:

  • Neighborhood assets: Predominantly Black neighborhoods came to, and continue to, lack:
  • Access to high quality educational opportunities
  • Access to local financial institutions
  • Access to high-quality health care resources
  • Etc.

Wealth and the uses of wealth

  • Two quick examples:
  • Access to the equity in homes is one of the main sources of funds available to most families for job related and medical emergencies:
    • The failure of homes in predominantly Black neighborhoods to increase in value nearly as rapidly as those in White neighborhoods therefore effects the stability of those families when faced with crises.
  • Access to the equity in homes is one of the main sources of funds for the intergenerational transfers of wealth (parental gifts):
    • Parental gifts are one of the main ways that many first-time home-buyers are able to purchase their homes, and are much more common among White than among Black Americans

What to do about it?

  • Government sponsored, supported, and tolerated racist policies:
  • Created and maintained high-levels of residential segregation and the attendant social problems accruing to Black Americans through “hyper-segregation”
  • Prevented Black Americans from becoming homeowners
  • Ensured that Black Americans would not gain equity in any housing they did own at anything like the same rate as White American homeowners

State-sponsored injustices demand a state response

Hence: Reparations…



How much? To whom?

Compare the current average wealth of White Americans due to home equity to the current average wealth of Black Americans due to home equity

This will underestimate the amount owed insofar as it fails to take account of neighborhood effects, etc.

It may overestimate the amount owed insofar as it fails to take account of pre-existing differences in housing-related wealth between White and Black Americans (pre-1934)…

BUT: These pre-existing differences were themselves the result of unjust actions on the part of government agencies!

And in any event, such differences are swamped by the likely value of neighborhood effects

Oh, how much? Well…

Amounts could easily exceed 10 trillion dollars!


To Whom?

It would be politically impossible, and likely foolish, to simply “split” the money and give every Black American an equal share…

Recent immigrants? Have they been disadvantaged to the same extent?

Successful middle-class Black Americans? Have they been disadvantaged as much as poor Black Americans? Or more – would they be doing even better without the disadvantages?

Better might be to institute policies that advantage those disadvantaged by previous policies…


Closing the Wealth Gap:

  • Federal and state governments should devote greater resources to preventing and prosecuting continuing racial steering and mortgage discrimination
  • Black Americans ought to be eligible for very favorable terms on mortgages, with very low interest rates and low or no down payment, with both mortgage insurance and the low interest rates subsidized by the government.
  • Black Americans should be provided with opportunities that would lead to the creation of wealth through means beyond the housing market alone:
    • Improved access to good primary education
    • Improved access to funding for secondary education
    • Very favorable terms for loans to start new businesses, etc.
    • Improved “safety nets” for crises

The merely good…

In order to create and fund policies that provide e.g. education and small business grants/loans, subsidized mortgages/mortgage insurance, etc., some of these programs might need to be “race blind.”

However, while this might be a necessary compromise, it remains important that the policies both compensate and be seen as compensating Black Americans for the history of injustice.

But if the results are important, is more important that any policies enacted not be racially indifferent than that they not be racially “blind.”

Don’t let the perfect be the enemy of the good!


This talk is based on:

“Housing Discrimination as a Basis for Black Reparations” Jonathan Kaplan and Andrew Valls. Forthcoming in Public Affairs Quarterly. Expected Publication: July, 2007.

Work on this project was supported in part by an Oregon State University College of Liberal Arts Research Grant.

Some Key References:

Charles, K. K. and E. Hurst. 2002. "The Transition to Home Ownership and the Black-White Wealth Gap." Review of Economics and Statistics 84: 281-97.

Gordon, Adam 2005. “The Creation of Homeownership: How New Deal Changes in Banking Regulation Simultaneously Made Homeownership Accessible to Whites and Out of Reach for Blacks.” The Yale Law Journal 115: 186-226.

Jackson, Kenneth T. 1985. Crabgrass Frontier: The Suburbanization of the United States. New York: Oxford University Press.

López Turley, Ruth, N. 2003. “When do neighborhoods matter? The role of race and neighborhood peers.” Social Science Research 32: 61-79

McCarthy, Thomas. 2004. "Coming to Terms with Our Past, Part II: On the Morality and Politics of Reparations for Slavery." Political Theory 32: 750-72.

Rusk, David. 2001. "The 'Segregation Tax': The Cost of Racial Segregation to Black Homeowners." Washington, DC: Brookings Institution Center on Urban and Metropolitan Policy.

Yinger, John. 1995. Closed Doors, Opportunities Lost: The Continuing Costs of Housing Discrimination. New York: Russell Sage Foundation.

Thanks to: Sharyn Clough, Samuel Wheeler, an anonymous reviewer, and participants at the “Race and Political Action” session of the American Political Science Association’s 2006 meeting.