Louis Hyman, a Harvard historian, writing in the New York Times…
WHILE critics of today’s mortgage crisis call for government intervention to suppress subprime lending, few are aware that government intervention created subprime mortgages in the first place.
The National Housing Act of 1968, part of President Lyndon Johnson’s Great Society, provided government-subsidized loans to expand home ownership for poor Americans. Liberal policymakers hoped that these loans, called Section 235 loans, would enable poor Americans — urban blacks in particular — to buy their own homes.
Under the program, a poor family could obtain a mortgage from a lender for as little as $200 down and pay only a small portion of the interest. If the borrower defaulted, the government paid the balance of the loan. If the borrower made payments on time, the government covered all of the loan’s interest above 1 percent. Homebuyers could borrow up to $24,000, as long as Federal Housing Administration inspectors declared the property to be in sound condition.
By 1971, Congressional and press investigations found the program riddled with fraud. Section 235 accelerated existing white flight by providing poor African-Americans with money to buy out their anxious white neighbors, who in turn accepted below-market prices for their houses. Real estate agents frightened white homeowners with visions of all-black neighborhoods financed by government money, and then pocketed the proceeds from the resulting high home turnover.
Existing homeowners lost their equity, but a canny alliance of brokers, lenders and federal housing inspectors inserted themselves as middlemen between the buyers and the sellers to reap profits. White speculators, often real estate agents themselves, bought houses cheaply from fleeing white homeowners, did superficial renovations and then sold the houses at steep prices to black first-time homeowners.
As the properties changed hands, the speculators profited and the government paid the tab…