The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .
The days of race-based housing discrimination in the U.S. are legally behind us, but the legacy of policies that kept nonwhite citizens out of some neighborhoods remains pervasive.
America’s discriminatory past can still be seen today with nonwhite mortgage borrowers generally getting charged higher interest rates, and persistent “voluntary” neighborhood segregation.
These trends can be traced in part to an official government policy of the past, commonly known as redlining, which codified racist attitudes in real estate and finance, and made it more difficult for nonwhites to purchase homes.
Redlining and American racism have a long and nuanced background, and this article is just a basic overview of the policy’s history, and how it continues to affect real estate and nonwhite homeownership today. It also highlights one expert’s proposal to address the legacy of redlining.
What is redlining?
Redlining was a policy that restricted investment in neighborhoods that were deemed especially risky to investors. Often these neighborhoods were in the oldest parts of cities, and tended to have larger-than-average shares of nonwhite residents.
This system of classifying geographic investment risk began around the time the Federal Housing Administration was established in the mid-1930s, and codified existing racial prejudices into the laws that facilitated economic recovery from the Great Depression.
The federal government was issuing insured loans to prospective homeowners as part of those efforts, but the money was not accessible to residents of “hazardous” neighborhoods. Many of the “desirable” neighborhoods under this system barred Black people from moving in.
The phrase “redlining” comes from the maps that dictated investment risk. Areas that were deemed the most risky for banks were colored in red, and institutions were prohibited from extending federally-backed loans in those neighborhoods.
How does redlining affect real estate today?
Redlining was official policy until the Fair Housing Act was passed in 1968. However, the current housing system was built on the foundations that redlining had left in place.
After 30-plus years of underinvestment in nonwhite neighborhoods, those areas continue to be seen as risky for investors, which makes it more difficult for residents there to move elsewhere, keeping many neighborhoods segregated even today.
Although there’s no official federal risk map anymore, most financial institutions do their own risk assessments, which take things like the stability of the housing market and existing property values into account.
“It’s like racism. We went from White-only bathrooms and entrances to, now we’re integrated in that regard, but tensions are still there,” Rob Rose, former executive director of the Cook County Land Bank Authority in Chicago, told Bankrate.
“With the rise of credit rating agencies and their ubiquity, how do we know it’s a fair system?” Rose said. “I don’t think, at my core, that African Americans are predisposed to be poorer and less financially secure.”
But, he noted, studies consistently show that Black borrowers generally have lower credit scores today, even when other factors like education and income are controlled for.
As a result, it remains more difficult for Black borrowers to qualify for mortgages — and more expensive for those who do, because they’re usually charged higher interest rates.
A 2020 Bankrate survey highlighted this trend, showing that Black and Hispanic mortgage borrowers were much more likely than their White counterparts to have mortgage interest rates of 6 percent or more. The study also looked at broader mortgage refinancing trends across various demographics.
“When we talk about redlining, the thing that carries through today that is the single-greatest barrier in helping to break out of these neighborhoods is the current appraisal process,” Rose said. “The appraisers are trying to do the best that they can within the parameters that they’re given, but it’s a broken system and industry that’s built on a faulty foundation.”
Because home appraisals look at past property value trends in neighborhoods, they reinforce the discrimination redlining codified by keeping real estate prices lower in historically Black neighborhoods. That, in turn, makes lenders assume they’re taking on more risk when they extend financing in those areas.
What can be done?
In Rose’s view, legislation is not enough to reverse the legacy of redlining. Lenders need to be ready to change their pricing models in order to level the playing field for nonwhite borrowers.
“At some point the financial institutions have to make a decision about what they want to be able to accomplish in this field,” Rose said.
Currently, financing in historically “risky” neighborhoods comes more from predatory, fringe institutions instead of mainstream legacy banks.
“Nowadays what that looks like is currency exchanges where, in addition to exchanging currency, you can borrow against the value of your car, you can get payday loans,” Rose said. “There’s a huge disconnect between what the consumer is willing to do and what the consumer is willing to put up with,” compared to where legacy financial institutions are willing to invest.
“You’re in a system where there is a ready market of people that can access the system and can afford to access the system, but you systematically charge them more and you make it harder,” Rose said. “If you remove those barriers, how much more steam will our economy be able to pick up if you allow them equitable access?”
He recommends that banks consider shifting away from risk-based pricing for their loans to some other system that would not lean so heavily on historical real estate trends.
Rose said banks may be able to learn from the world of professional sports.
“Where we are with mortgages sort of reminds me where we were with sports 50 or 60 years ago,” Rose said. “African Americans weren’t allowed to participate in professional sports, and to the extent that we were able to break those professional barriers, sports became a richer, fuller experience for everyone.”
Rose said athletes and team owners learned that there was no good reason to keep nonwhites off the playing field, and similarly, there’s no good justification for making it more difficult for nonwhites to access financing.
“For these bank presidents, what do you have to lose?” Rose said. “We have a marketplace in which people are willing to pay 5,200 percent” interest on products like payday loans. Banks could easily extend non-subsidized loans with 10 percent interest — well above the current market rate for mortgages — and still make money on that lending, Rose added, while also making it easier for borrowers who would otherwise be getting charged much higher rates by more predatory lenders.
Racist housing and lending policies continue to affect the American real estate market, and it will take a wholesale change to correct those historic inequities.
But, there are ways to address them, like changing the way home loans are priced and the assessment system for real property value. These kinds of changes can be made on the institutional level, not just through legislation.
Today, redlining is not an official policy, but its legacy makes it more difficult for nonwhite people to participate in the American Dream.