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The days of legally sanctioned race-based housing discrimination may be behind us, but the legacy of attitudes and practices that kept nonwhite citizens out of some neighborhoods and homeownership remains pervasive. Redlining, one of these practices, is especially notorious in U.S. real estate history.
What is redlining? Technically, it refers to lending discrimination that bases decisions on a property’s or individual’s location, without regard to other characteristics or qualifications. In a larger sense, it refers to any form of racial discrimination related to real estate.
America’s discriminatory past can still be present today with nonwhite mortgage borrowers generally getting charged higher interest rates and the persistence of neighborhood segregation. These trends can be traced in part to redlining, an official government policy dating from the 1930s, which codified racist attitudes in real estate finance and investment, and made it more difficult for nonwhites to purchase homes.
Redlining and racism in America have a long, complex and nuanced history. This article serves as a primer on the policy’s background and how it continues to affect real estate and nonwhite homeownership today. It also includes suggestions to reduce redlining’s lingering effect.
- Redlining refers to a real estate practice in which public and private housing industry officials and professionals designated certain neighborhoods as high-risk, largely due to racial demographics, and denied loans or backing for loans on properties in those neighborhoods.
- Redlining practices were prevalent from the 1930s to the 1960s.
- Ostensibly intended to reduce lender risk, redlining effectively institutionalized racial bias, making it easier to discriminate against and limit homebuying opportunities for people of color. It essentially restricted minority homeownership and investment to “risky” neighborhoods.
- Though redlining is now illegal, its legacy persists, with ongoing impact on home values, homeownership and individuals’ net worth. Discrimination and inequities in housing practices and home financing still exist.
What is redlining?
Redlining — both as a term and a practice — is often cited as originating with the Federal Home Owners’ Loan Corporation (HOLC), a government agency created during the 1930s New Deal that aided homeowners who were in default on their mortgages and in foreclosure. HOLC created a system to assess the risk of lending money for mortgage loans within particular neighborhoods in 239 cities.
Color-coded maps were created and used to decide whether properties in that area were good candidates for loans and investment. The colors — from green to blue to yellow to red — indicated the lending risk level for properties. Areas outlined in red were regarded as “hazardous” (that is, high risk) — hence, the term “redlining.”
Redlined areas typically had a high concentration of African-American residents and other minorities. Historians have charged that private mortgage lenders and even the Federal Housing Administration (FHA) — created in 1934 to back, or insure, mortgages — used these maps or developed similar ones to set loan criteria, with properties in those redlined areas incurring higher interest rates or not qualifying at all. Real estate brokers often used them to segregate buyers and sellers.
“This practice was widespread and institutionalized, and it was used to discriminate against minorities and low-income communities,” says Sam Silver, a veteran Santa Clarita, Calif.-based Realtor, real estate investor and commercial lender.
The impact of redlining on the mortgage lending industry
Following World War II, the U.S. had a huge demand for housing, as many returning American servicemen and -women wanted to settle down and begin raising families. Eager to help these veterans, the FHA expanded its financing and loan-insuring efforts, essentially empowering Uncle Sam to back lenders and developers and reducing their risk when offering construction and mortgage loans.
“That lower risk to lenders resulted in lower interest rates, which granted middle-class people the ability to borrow money to purchase homes,” says Rajeh Saadeh, a real estate and civil rights attorney and a former Raritan Valley Community College adjunct professor on real estate law in Bridgewater, New Jersey. “With the new lending policies and larger potential homeowner pool, real estate developers bought huge tracts of land just outside of urban areas and developed them by building numerous homes and turning the areas into today’s suburbs.”
However, many of these new developments had restrictions stated in their covenants that prohibited African-Americans from purchasing within them. Additionally, there were areas within cities, already heavily populated by minorities, that were redlined, making them ineligible for federally backed mortgages (which effectively meant, for affordable mortgages, period). Consequently, people of color could not get loans to buy in the suburbs, nor could they borrow to purchase homes in areas in which they were concentrated.
“Redlining was part of a systemic, codified policy by the government, mortgage lenders, real estate developers and real estate agents as a bloc to deprive Black people of homeownership,” Saadeh continues. “The ramifications of this practice have been generational.”
The (official) end of redlining
During the mid-20th century, redlining predominated along the East Coast, the eastern sections of the South and the Midwest, and several West Coast metropolitan areas. Black neighborhoods and areas adjacent to them were the ones most likely to be redlined.
Redlining as a sanctioned government practice ended with the passage of the Fair Housing Act in 1968, which specifically prohibits racial discrimination in the housing industry and among professionals engaged in renting, buying, selling and financing residential properties. The Act’s protections were extended by the Equal Credit Opportunity Act (1974) and the Community Reinvestment Act (1977).
The Department of Housing and Urban Development (HUD) — specifically, its Office of Fair Housing and Equal Opportunity (FHEO) — investigates reports of redlining. For example, prompted by a complaint filed by the non-profit National Community Reinvestment Coalition, HUD has been examining whether several branches of HSBC Bank USA engaged in discriminatory lending practices in Black and Hispanic neighborhoods in six U.S. metropolitan areas from 2018-2021, HSBC recently disclosed in its Form 10-Q for the second quarter 2023.
How does redlining affect real estate today?
The practice of redlining has significantly impacted real estate over the decades in several ways:
- Redlining has arguably led to continued racial segregation in cities and neighborhoods. Recent research shows that almost all formerly redlined zones in America remain disproportionately Black.
- Redlined areas are associated with a long-term decline in homeownership, home values and credit scores among minorities, all of which continue today.
- Formerly redlined areas tend to have older housing stock and command lower rents; these less-valuable assets contribute to the racial wealth gap.
- Redlining curbed the economic development of minority neighborhoods, miring many of these areas in poverty due to a lack of access to loans for business development. After 30-plus years of underinvestment, many nonwhite neighborhoods continue to be seen as risky for investors and developers.
- Other effects of redlining include the exclusion of minority communities from key resources within urban areas, such as health care, educational facilities and employment opportunities.
Today, 11 million Americans live in formerly redlined areas, estimates Kareem Saleh, founder/CEO of FairPlay AI, a Los Angeles-based organization that works to mitigate the effects of algorithmic bias in lending. He says about half of these people reside in 10 cities: Baltimore, Boston, Chicago, Detroit, Los Angeles, Milwaukee, New York City, Philadelphia, San Francisco and San Diego.
“Redlining shut generations of Black and Brown homebuyers out of the market. And when members of these communities did overcome the barriers to purchasing homes, redlining diminished their capacity to generate wealth from the purchase,” says Saleh. “To this day, redlining has depressed property values of homes owned in minority communities. The enduring legacy of redlining is that it has blocked generations of persons of color from accessing a pathway to economic empowerment.”
“Also, due to redlining, African-Americans who couldn’t qualify for government-backed mortgages were forced to pay higher interest rates. Higher interest rates translate to higher mortgage payments, making it difficult for minorities to afford homes,” Elizabeth Whitman, a real estate attorney and real estate broker in Potomac, Maryland, says. “Since redlining made it more expensive to obtain a mortgage, housing wasn’t as easy to sell and home prices got suppressed in redlined areas.”
Data from FairPlay AI’s recent “State of Mortgage Fairness Report” indicate that equality in mortgage lending is little better today for many nonwhite groups than it was 30 years ago — or it has improved very slowly. For example, in 1990, Black mortgage applicants obtained loan approvals at 78.4 percent of the rate of White applicants; in 2019 that figure remained virtually unchanged — though it did rise to 84.4 percent in 2021.
Although there’s no official federal risk map anymore, most financial institutions do their own risk assessments. Unfortunately, bias can still enter into these assessments.
“Lenders can use algorithms and big data to determine the creditworthiness of a borrower, which can lead to discrimination based on race and ethnicity. Also, some real estate agents may steer clients away from certain neighborhoods based on their racial makeup,” Silver points out.
With the rise of credit rating agencies and their ubiquity, how do we know it’s a fair system? I don’t think, at my core, that African-Americans are predisposed to be poorer and less financially secure.
— Rob Roseformer executive director of the Cook County Land Bank Authority in Chicago
Insurance companies have also used redlining practices to limit access to comprehensive homeowners policies. And the home appraisal industry has also employed redlining maps when valuing properties, which has further repressed housing values in African-American neighborhoods, according to Whitman.
Furthermore, a 2020 National Fair Housing Alliance study revealed that Black and Hispanic/Latino renters were more likely to be shown and offered fewer properties than White renters.
Redlining’s ongoing legacy
Even without conscious bias, the legacy of redlining — and its impact on the accumulation of assets and wealth — can put nonwhite loan applicants at a disadvantage to a disproportionate degree. For example, studies consistently show that Black borrowers generally have lower credit scores today, even when other factors like education and income are controlled for. Credit scores, along with net worth and income, are of course a key factor in determining mortgage eligibility and terms.
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. Other minorities are also much more likely to pay a higher interest rate than their White counterparts.
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.
“The single-greatest barrier in helping to break out of these neighborhoods is the current appraisal process,” says Rob Rose, former executive director of the Cook County Land Bank Authority in Chicago. “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.”
What can be done to reduce the impact of redlining?
The current housing financing system is built on the foundations that redlining left in place. To decrease the effects of redlining and its legacy, it’s essential to address the underlying biases that led to these practices.
“This can be done through Fair Housing education and training of real estate professionals, increased enforcement of Fair Housing laws, and investment in communities that have been historically redlined,” suggests Silver.
Others insist that the public and private sectors need to play a bigger role in combating prejudice and discrimination.
“Federal regulators likely will continue to put pressure on financial institutions and other stakeholders in the mortgage ecosystem to root out bias,” says Saleh. “The Department of Justice’s Combatting Redlining Initiative shows the government’s commitment to supervisory oversight. There are also policy and regulatory moves, such as the recent push by regulators encouraging lenders to use Special Purpose Credit Programs — lending programs specifically dedicated to remedying past discrimination. Similarly, various federal task forces have been actively addressing historical biases and discriminatory practices in the appraisal industry.”
Also, financial institutions could adjust their underwriting practices and algorithms to better evaluate nonwhite loan applicants, and help level the playing field for them. For example, in late 2022, Fannie Mae announced it had adjusted its automated Desktop Underwriter system — widely used by bank loan officers — to consider bank account balances for applicants who lack credit scores. Fannie and its fellow mortgage-market player, Freddie Mac, now may also consider rent payments as part of borrowers’ credit histories.
Such efforts won’t eradicate the effects of redlining overnight, of course. But they can be a start towards helping more people towards a key piece of the American Dream.
If you believe you are the victim of redlining or another sort of housing discrimination, you have rights under the Fair Housing Act. You can file an online complaint with or phone the U.S. Department of Housing and Urban Development at (800) 669-9777. Additionally, you can report the matter to your local private Fair Housing center or contact the National Fair Housing Alliance.
A subsection of the Civil Rights Act of 1968, the Fair Housing Act protects people from discrimination when they are renting or buying a home, getting a mortgage, seeking housing assistance or engaging in other housing-related activities. Additional protections apply to federally assisted housing. The U.S. Department of Housing and Urban Development oversees the Act.
The Fair Housing Act of 1968 officially outlawed the practice of redlining — deeming certain neighborhoods (usually minority- or immigrant-heavy areas) “hazardous” and allowing lenders to effectively boycott them. While it did not immediately end redlining or discriminatory housing practices, the Act did offer individuals recourse if they felt their rights had been violated.
The generational wealth gap refers to the disparity between the net worth (money, assets, investments, etc.) accumulated within one particular generation versus the wealth accrued by another age group. There is also a racial wealth gap, which pertains to the difference between wealth accumulation by Whites versus nonwhite populations. In the U.S., the average Black or Hispanic/Latino household earns roughly half as much as the average White household and owns only about 15 to 20 percent as much net wealth, according to Federal Reserve data. And fewer than half of Black and Hispanic Americans are homeowners, versus three-quarters of White Americans, according to the U.S. Census Bureau (as of Q3 2022).