" To solve the inability of middle-class renters to purchase single-family homes for the first time, Congress and President Roosevelt created the Federal Housing Administration in 1934. The FHA insured bank mortgages that covered 80 percent of purchase prices, had terms of twenty years, and were fully amortized. To be eligible for such insurance, the FHA insisted on doing its own appraisal of the property to make certain that the loan had a low risk of default. Because the FHA's appraisal standards included a whites-only requirement, racial segregation now became an official requirement of the federal mortgage insurance program. The FHA judged that properties would probably be too risky for insurance if they were in racially mixed neighborhoods or even in white neighborhoods near black ones that might possibly integrate in the future.

When a bank applied to the FHA for insurance on a prospective loan, the agency conducted a property appraisal, which was also likely performed by a local real estate agent hired by the agency. as the volume of applications increased, the agency hired its own appraisers, usually from the ranks of the private real estate agents who had previously been working as contractors for the FHA. To guide their work, the FHA provided them with an Underwriting Manual. The first, issued in 1935, gave this instruction: 'If a neighborhood is to retain stability it is necessary that properties shall continue to be occupied by the same social and racial classes. A change in social or racial occupancy generally leads to instability and a reduction in values.' Appraisers were told to give higher ratings where '[p]rotection against some adverse influences is obtained,' and that '[i]mportant among adverse influences . . . are infiltration of inharmonious racial or nationality groups.' The manual concluded that '[a]ll mortgages on properties protected against [such] unfavorable influences, to the extent such protection is possible, will obtain a high rating.'

The FHA discouraged banks from making any loans at all in urban neighborhoods rather than newly built suburbs; according to the Underwriting Manual, 'older properties . . . have a tendency to accelerate the rate of transition to lower class occupancy.' The FHA favored mortgages in areas where boulevards or highways served to separate African American families from whites, stating that '[n]atural or artificially established barriers will prove effective in protecting a neighborhood and the locations within it from adverse influences, . . . includ[ing] prevention of the infiltration of . . . lower class occupancy, and inharmonious racial groups. "

― Richard Rothstein, , The Color of Law: A Forgotten History of How Our Government Segregated America