Path Dependent Political & Economic Effects of the Home Owners Loan Corporation

• In Event: Land Use Policies, Local Boundaries, and Neighborhood Inequalities

Abstract

The Great Depression of 1929 resulted in a marked increase in poverty, financial institution failures, deflation, and mortgage foreclosures. In response to this prolonged economic downturn, Congress passed the Home Owners’ Loan Act in 1933. This legislation established the Home Owners’ Loan Corporation (HOLC), governed by the Federal Home Loan Bank Board (FHLBB), which could exchange government bonds for delinquent mortgages. In 1935, the FHLBB, through HOLC, began the City Survey Program to appraise real estate risk across the nation’s neighborhoods, developing reports and graded maps (FHA Underwriting Manual 1935). These maps reified the perceived association between racial minorities and real-estate undesirability among FHLBB City Survey respondents that dominated the social, economic, and political landscape of the time.

The long-term ramifications for contemporary politics, outcomes, and institutions have been largely overlooked by the literature on the Home Owners’ Loan Corporation and by political scientists. And yet, neighborhoods and their dynamics bear long-lasting effects that have important implications for understanding economic class; individual behavior; social capital and attitudes; as well as populations Durlauf (2004). Beyond economic and social effects, the cannon on political participation argues that socially based participation—for example, speaking to neighbors about politics—is affected by neighborhood status and contexts (Giles and Dantico 1982; Huckfeldt 1979).

Given Tobler’s law, which highlights local clustering of outcomes as "near things are more related than distant things" (Miller 2004), I focus on the impact of 1935 HOLC Designations for a given location. I argue that because the institutions and historical contexts of neighborhoods have long-lasting effects on future economic and political dynamics, differences in the HOLC City Survey Program risk designations may have had enduring effects. Specifically, I explore path dependence, by showing how historical institutional decisions and perceptions alter neighborhood effect trajectories.

To analyze this, I created a large-scale historical dataset using information from the HOLC City Survey designation maps, as well as demographic information for 211,267 Census block groups from the year 2016 and 66,438 Census tracts from the year 1940. The result is a dataset of information pertaining to the 7,392 neighborhoods assessed during the City Survey program in 1935. Because of the nuances of spatial data, I perform a variety of models to assess the effect of HOLC letter grade designations on modern outcomes which include OLS, spatial regression, geographically weighted models, and geographic regression discontinuity design.

Controlling for 1940 characteristics enables me to address the alternative explanation that areas with lower HOLC designations had inherently less economic opportunity and higher levels of financial risk and that these levels of risk continue to persist today. I find that HOLC amplified neighborhood differences in investment opportunities and housing values, perpetuating the trends of poverty. In particular, the two lowest HOLC designations—Red (D) and Yellow (C)—were associated with an increase in the size of the population with worse income-to-poverty levels, and an increase in the amount of public assistance income collected by households. Lastly, I test the effects of the 1935 neighborhood HOLC designation on modern voter behavior with a geographic regression discontinuity design. This analysis reveals that neighborhoods with the two lowest HOLC designations are associated with a lower 2016 voter turnout and voter registration levels than those with the two highest designations, Green (A) and Blue (B).

In sum, this work analyzes 7,392 neighborhoods assessed during the 1935 HOLC City Survey program and finds an association between HOLC designations and modern political and economic outcomes. Policy practices such as the HOLC mortgage rating designations—which ended in 1951 after refinancing over one million mortgages—maintain a path dependence that continues to have implications on present-day neighborhood demographics, economic circumstances, and voter engagement.

Author

• Jennifer E. Cryer, Stanford University