The Incredible HOLC 
By Martin Harris

There’s a wry joke making the rounds these days about the collapse of the sub-prime mortgage finance structure, which seems to have been the "root cause" of subsequent distress in global financial markets, consumer spending slumps, growing unemployment, and probably a couple of trillion in various governmental bail-out and stimulus initiatives, which in turn will increase the money supply and lead to some very interesting inflation and …oh, what-the-heck. It now seems the banks were lending to NINJA’s, a term which, it turns out, doesn’t describe athletic sword-wielding Japanese guys in black pajamas. It describes approved mortgage-loan recipients with No Incomes, No Jobs, or Assets. It doesn’t describe why the lenders did so.

The answer goes back to –"root cause", in Left-speak— a 1933 creation of FDR’s New Deal, the Home Owners’ Loan Corporation (HOLC for short) intended to prevent home owner foreclosures during the Great Depression by re-financing at-risk residential  mortgages. It was HOLC, I learned for the first time in Douglas Rae’s book "City: The End of Urbanism", which invented red-lining through its A-B-C-D neighborhood-quality-evaluation system, whereby D (do-not-lend) neighborhoods were shown on maps as surrounded by a red line. That policy lasted for 44 years until reversed by the 1977 Community Reinvestment Act of the Carter Administration, which ordered lenders to reduce their loan-applicant standards and end red-lining. The rules were subsequently made more and more lend-to-the-most-risky, for example the 1995 regulations of the Clinton Administration, until the joke about mandatory lending to NINJA applicants became a mortgage reality. In more rarified financial circles, the phrase "sub-prime" was used to describe borrowers who were statistically likely to default. When they did so, the present economic downturn was triggered. You can argue about the red-lining practices of the incredible HOLC, but you can’t argue about the NINJA lending required by the CRA as a "cure" for the earlier government policy. If you can tolerate some more wry humor, you might wonder how a regulatory demand –the super-loose lending requirements of the Community Reinvestment Act—have not been acknowledged by its defenders as the "root cause" of the present sub-prime mortgage situation, who have preferred to blame it on "insufficient regulation", as if lenders had never been mandated to lend to NINJA borrowers, but had gone out to solicit such probable-default borrowers on their own suicidal initiative. Not to mention the role of community-action groups like ACORN in rounding up clients –actual NINJA’s and potential "borrowers"-- and using mobs of them to picket reluctant banks.

The incredible HOLC expired in 1951, but its legacy lives on. Rae makes the clear connection, in writing about its impact on New Haven, CT, that the red-lining of the ‘30’s was the "root cause" of deterioration in neighborhoods which had previously been quite stable, making such blighted-by-government-policy areas into prime targets for urban renewal projects starting in the ‘50’s. Like the HOLC-to-CRA policy reversal (from do-not-lend to do-not-deny) urban renewal has produced its own 180-degree change in official doctrine, illustrated by its early architectural infatuation with high-rise-tower housing for its low- or no-income clientele and its subsequent oops-never-mind decision that such towers "don’t work". Most have been demolished and replaced with low-rise units, including the Elm Haven Extension towers in New Haven, built in the ‘50’s and removed in the ‘80’s on the grounds that such towers are "inhumane" modes of housing. You’re not supposed to ask why such towers "work" just fine when they’re built  as middle- and high-end rentals alongside Lake Shore Drive in Chicago or Riverside Drive in New York, but not as taxpayer-subsidized units at Cabrini Green, Pruit-Igoe (St. Louis), or, as Rae points out, Elm Haven Extension.

A typical example is the Highland Park public housing project in Milwaukee, for which two  12-story 220-unit circular-plan towers were built in the ‘60’s. Maybe the design advocates argued, however improbably, that round buildings are less expensive than rectangular ones, but no matter; in 2004 they were leveled, because they were "inhumane" and "didn’t work", and were replaced with "low-rise" housing at a taxpayer cost of $30 million, the Milwaukee Business Journal reports. Maybe not much by modern standards, but nevertheless another good example of reversals in government policy and "your tax dollars at work". 

Martin Harris is a former Chairman of Citizens for Property Rights