The Streets Were Paved with Gold - Ken Auletta [45]
This denial of mortgage and insurance money is called redlining, a process whereby a financial institution is said to draw a red line or quarantine around a neighborhood, declaring that neighborhood unworthy of investment. Community groups complain that financial institutions are not using economic criteria—Jean Loretto’s building is a sound investment—but instead rely on arbitrary geographic and social criteria. Lending institutions deny this, claiming that as profit-making institutions their decisions are economic, whereas many neighborhood loans are not.
Whether or not a conspiracy exists, it is clear that city neighborhoods have been devastated by disinvestment. A thick 1977 report from the state Banking Department to the legislature offered compelling evidence. Surveying the entire state, they dryly reported: savings bank assets rose by $21.5 billion between 1970 and 1975, yet only $3.9 billion of this sum was earmarked for residential mortgages within the state. During the same period, residential mortgages on out-of-state properties increased by $4.8 billion. Within the city, mortgage loans as a percentage of local savings bank deposits was just 15 percent. In Nassau County, it was 62 percent. A case study revealed that between 1970 and 1976 fourteen Brooklyn savings banks increased their deposits from $10.1 billion to $16.8 billion. Yet in 1976: “Brooklyn mortgages were 11.2% of Brooklyn deposits.” The Brooklyn banks studied had 23.5 percent of their total residential mortgages in Brooklyn—and 51.7 percent in the surrounding suburbs. Money, like people and jobs, was fleeing. “Redlining is happening in New York, not only in the bombed-out areas, but in areas where there seems no rhyme or reason for it,” J. Robert Hunter, acting Chief of the Federal Insurance Administration told a city public hearing in early 1978.
There are many reasons for disinvestment. Banks and insurance companies are not charitable institutions. They are in business to earn a profit. In many blighted or declining neighborhoods, profits are precarious and losses are great. One of five FHA multi-family insured mortgages in the New York metropolitan area was in default in 1978, and the city number was higher. The state banking study showed that between 1970 and 1975 savings bank home mortgage delinquencies in the city rose 400-fold to 2.37 percent. The maze of city rent control, housing and mortgage regulations is also to blame. Because of tight city and state regulations on rents and conversions to tenant-owned cooperatives, smaller landlords often do not generate sufficient revenues to justify secure loans. Insurance companies do not start fires or rob stores, and as vandalism grows so will insurance rates. The state arbitrarily set the mortgage interest rate at 8.5 percent—below the prime rate of 9 or so percent—so banks could make more money out of state. The bottom line for financial institutions is profit.
The bottom line for New Yorkers is declining neighborhoods. The economic price of disinvestment is no greater than the psychological. In fact, they go together. When residents sense that a neighborhood is slipping, when investment money dries up, decline becomes self-fulfilling. The result is abandonment. Middle-income homeowners are replaced by poor renters, with welfare often paying the rent. Because landlords can usually collect higher rents from welfare than from the free market, the result is blockbusting. More poor people means more youth gangs. More youth gangs means more arson—often subsidized by landlords to collect on an old insurance policy and get out; sometimes encouraged by welfare recipients to collect a relocation allowance and get out. Bushwick is the result. Or Coney Island. Brownsville. East New York. Harlem. The South Bronx. Maybe Corona?
How redlining