The United States has made substantial efforts to eliminate racial discrimination in housing and mortgage lending over the last fifty years, the stains of historical segregation continues to mark our institutions. The effect of redlining real estate, a once-prevalent type of racial discrimination in housing, can still be seen in major cities across the nation. But exactly what does redlining mean?
Redlining is a type of lending discrimination. Redlining real estate involves the systematic denial of loans to certain communities – those supposedly outlined in red on private maps – because the banks consider them financially risky. Redlining discrimination primarily focuses on minority communities and has been illegal for over 50 years. But still, many prospective homebuyers may struggle to get loans due to redlining discrimination in their communities. In addition to the damage this practice does to perspective homebuyers, it causes sellers to struggle to sell their homes.
The History of Redlining
As applied to lending discrimination, the term “redlining” was coined in the 1960s based on a practice that originated in the 1930s. It officially started after the passage of the National Housing Act, which created the Federal Housing Administration (FHA). One year after the NHA was passed, the Federal Home Loan Bank Board asked a lending corporation to create a “residential security map” of 239 cities to help banks differentiate neighborhoods based on their desirability for lending purposes. Private organizations followed suit, creating similar redlined maps. On these maps, the neighborhoods banks identified as desirable were mostly white, affluent neighborhoods – outlined in green – whereas less desirable but still viable lending options were outlined in yellow or blue. The neighborhoods considered “risky” for discriminatory bank lenders were outlined in red. Redlined neighborhoods on these original maps were majority Black neighborhoods in older city-centers.
Both private and public entities used redlining discrimination to deny loans to Black loan applicants for years to come. This historical practice caused lasting damage. Racial disparities remain in housing in large cities across the country, and particularly in historically diverse cities. In Philadelphia, a recent study found African Americans 2.7 times less likely to receive a conventional mortgage loan than non-Hispanic whites, despite making up a similar portion of the population. Washington D.C. and Baltimore have also had to grapple with this issue time and time again. Challenges posed by redlining discrimination continue to negatively impact the experience of living in diverse cities like these.
Is Redlining Illegal?
Redlining real is undeniably illegal. The Fair Housing Act
expressly prohibits lending discrimination against neighborhoods on the basis of race and other protected factors. Further, the Equal Credit Opportunity Act
prohibits racial discrimination in any part of a credit transaction, including redlining real estate. Still, the practice continued. Congress passed the Community Reinvestment Act
in 1977 in an attempt to stop discriminatory lending once and for all. This law required federal regulators to evaluate every bank’s practices to ensure they provide credit opportunities to low- and moderate-income neighborhoods.
Despite these laws, there is evidence that redlining discrimination remains a fair housing issue. Redlining today still causes lenders to end up in court. In 2015, Hudson City Savings Bank
agreed to the redlining settlement in history to end ongoing litigation against it. As a result of is lending discrimination, the bank offered a settlement of $33 million for failing to establish any mortgage lending branches in majority Black and Hispanic neighborhoods in New Jersey, New York, and Philadelphia. Other large cities like Miami and Los Angeles
are currently pursuing lawsuits against major banks for both denying loans to people from minority backgrounds and raising the interest rates for those they do approve.
Despite being unquestionably illegal, a loophole
in the Community Reinvestment Act has resulted in further racial discrimination in housing. The Act allows white borrowers to access special home loan options to purchase in historically Black neighborhoods — a process that only makes the existing racial housing gap worse.
The Housing Gap
What does redlining mean for modern homebuyers? Redlining discrimination impacts a person’s ability to purchase a house because it restricts their ability to get a loan from a bank. Thus, one of the most visible impacts of redlining is seen in the racial housing gap – which is actually worse today
than it was in 1960. In 1960, 38% of Black families owned their own homes as compared to 65% of whites. Although the percentage of Black homeowners had risen to 42% in 2017, the racial divide in access to housing is even greater than it was before, since 72% of white families are homeowners. Redlining today fuels the housing gap, which feeds into a continuing cycle of racial wealth inequality and poverty.
Homeownership offers opportunities for increased wealth. Owning a home has tax benefits
and provides families with an investment that appreciates in value over time. As a result of redlining discrimination, it can be substantially more difficult for people from minority families to buy a house. In this manner, redlining today limits access to the wealth benefits that stem from a home purchase. Thus, the cycle of discrimination-imposed poverty continues.
A recent report
demonstrated that borrowers in 61 metropolitan areas across the United States are still experienced redlining. This was true even when researchers controlled factors like income, loan details, and neighborhood. Thus, there is clear evidence of lending discrimination even among modern banks.
Redlining today happens when loan applications are denied or unnecessarily delayed simply because the applicant is a racial minority. Often, it takes the form of a giving these individuals the run-around: failing to return calls or making unreasonable documentation requirements. This type of bank redlining still violates the spirit and intent of fair housing laws, but it is very difficult to prove.
Modern Mortgage Lending Disparities
In 2018, Black borrowers in Philadelphia were denied loan applications more than twice as often
as white borrowers. Hispanic borrowers also experience higher rates of loan denials than whites, with 22.2% of applicants denied in Columbus, Ohio, and 15% denied in Miami, Philadelphia, Chicago, and New York City. Although these numbers are lower than denial rates lending discrimination caused when redlining was first established in the early 20th century, it is clear that efforts to eliminate redlining have not ended the practice entirely.
How Bank Redlining Can Affect Buyers and Sellers
The discriminatory impact of redlining today affects both buyers and sellers. Depending on their racial identity, buyers may have fewer options for available loans. When large portions of the population are subject to systematic lending discrimination, they are left out of the lending process. Thus, sellers have a smaller pool of potential buyers.
Redlining today continues to reflect the historical challenges America has experienced with respect to racial wealth inequality and cycles of poverty. But redlining real estate is not just a problem affecting certain communities. Redlining discrimination strangles economic growth in neighborhoods and cities at large. By influencing property ownership, community demographics, and economic viability, this ongoing shadow of racial segregation hurts everyone.