Seton Hall University School of Law
Wednesday, November 11, 2020
8:30 to 9:45 AM Pacific Time
This Article will examine how the U.S. government financially profited from federal policies that not only produced racial segregation in housing but also led to the widespread theft of black wealth.
Until the late 1960s, it was the policy of the Federal Housing Administration not to subsidize or insure mortgages for homes located in areas where blacks lived, something called redlining. As a result, banks seldom made loans to black homebuyers, creating an opportunity for real estate speculators to exploit their plight through a process known as blockbusting. Blockbusting consisted of two separate steps. First, the speculators bought homes from whites at a discount after scaring them into thinking that blacks were moving into the area. Next, the speculators resold the homes at an inflated price to black buyers through a device known as an installment sales contract. Although such a contract permitted the buyer to pay for the home gradually over time, the buyer’s monthly payments and total cost far exceeded what they would have been under an FHA-insured mortgage. Moreover, if the buyer missed a payment, the speculator got to keep the house and all the buyer’s prior payments.
Installment sales contracts are responsible for extracting billions of dollars in wealth from black homebuyers. Moreover, those same dollars supported parasitic ecosystem that enriched an extensive network of participants, including private investors who purchased interests in the contracts, and financial institutions that provided the funds the speculators needed to finance the initial purchase. Not only did this ecosystem owe its existence to a racially biased federal policy, it also allowed the federal government to collect much more tax revenue than it would have otherwise. These tainted tax dollars arose for four reasons. First, the volume of money changing hands was larger than it would have been if blacks did not have to pay a premium for their homes. Second, the money within the ecosystem changed hands more often, with each transaction between speculators, investors, and other participants functioning as a separate taxable event. Third, certain amounts that would have been partially taxed, tax-exempt or tax deferred outside of the ecosystem were instead fully taxed in the current year within it. Fourth, the taxable income generated within the ecosystem far exceeded any offsetting tax deductions available to the participants within it.
Past research has estimated how widely installment sales contracts were used and the amount of money that blacks lost as a result. This Article will account for where some of the money went. It specifically will show how some of the money funded the very government whose racially biased policy created an opportunity for real estate speculators to use the instalment sales contract as an instrument of racial plunder. Equally important, it will show how those tax dollars offset the government’s cost to run the very mortgage insurance program that blacks could not access. Because that program enabled whites to buy homes and build most of their wealth, this project will show that the wealth extracted from black families fueled the engine that created the wealth that white families now possess.
Given the current attention to the unequal distribution of wealth along racial lines, this Article will help inform debates about the forces producing that inequality and the government’s obligations to remedy it.