Key Takeaways
Redlining was a real estate practice that designated certain neighborhoods as high-risk, based primarily on racial demographics, and then refused to lend to properties located there. Ostensibly designed to reduce risk for lenders, the practice institutionalized racial bias and limited homebuying opportunities for Black Americans. Though redlining is now illegal, its legacy remains, with ongoing effects on home prices, homeownership, and wealth.
Fortunately, the days of legally sanctioned race-based housing discrimination are behind us. But that didn't stop discrimination from continuing. The legacy of attitudes and practices that have prevented non-white citizens from owning homes remains.
To this day, racial segregation continues in many areas, and mortgage borrowers of color often face higher interest rates. This is due in part to redlining, a federal policy that began in the 1930s that made it harder for non-whites to buy homes and codified racist attitudes in the real estate industry. Learn more about the history of redlining's complicated impact on the American real estate industry.
What is redlining in real estate?
Redlining, both as a term and a practice, is often said to originate from the Homeowners Loan Corporation (HOLC), a government agency created during the New Deal in the 1930s to help homeowners who fell behind on their mortgage payments and faced foreclosure. The HOLC created a system to rate the risk of lending mortgages in certain neighborhoods.
A color-coded map was created and used to determine whether properties in an area were suitable for loans or investments. The colors indicated the lending risk level of the property, and areas outlined in red were considered “unsafe” or high risk, hence the name “redlining.”
Redlined areas contained high concentrations of African-Americans and other ethnic minorities, reinforcing racial segregation. Historians claim that private mortgage lenders and even the Federal Housing Administration (FHA) used these maps, or created similar ones, to set loan standards, resulting in higher interest rates for properties in redlined areas or not qualifying at all. In fact, according to the Federal Reserve Bank, “the FHA's 1938 underwriting manual emphasized the adverse effects of 'the infiltration of discordant racial groups' on credit risk.”
“This practice was widespread and institutionalized and was used to discriminate against minorities and low-income people,” said Sam Silver, an agent with eXp Realty in Santa Clarita, California.
How redlining impacts real estate
After World War II, the demand for housing surged in the United States as many returning veterans wanted to settle and start families. The Veterans Reemployment Act of 1944 provided veterans with benefits such as low-interest mortgages, essentially empowering the US government to assist lenders and developers.
“Reduced risk for lenders led to lower interest rates, making it easier for middle-class people to borrow money to buy homes,” says Rajeh Saadeh, a real estate attorney in Bridgewater, N.J. “New lending policies and a wider pool of potential homebuyers encouraged real estate developers to buy large tracts of land just outside urban areas and build and develop large numbers of homes, transforming the areas into the suburbs they are today.”
However, many of these new developments had restrictions that prevented black Americans from buying homes there. Additionally, some areas of cities that already had high concentrations of minorities were redlined, making them ineligible for federally backed mortgages (i.e., affordable mortgages). As a result, people of color, including black military personnel who had served their country and returned home, were unable to get loans to buy homes in the suburbs, and they were also unable to get loans to buy homes in the areas where they were concentrated.
“Redlining was part of a systematic codification of policies by governments, mortgage lenders, real estate developers, and real estate agents working together to deprive Black people of homeownership,” Saadeh said. “The effects of this practice have continued for generations.”
The (official) end
The official practice of redlining ended in 1968 with the passage of the Fair Housing Act, which explicitly prohibited racial discrimination in the housing industry and among professionals involved in renting, buying, selling, and financing residential property. The protections of this law were expanded by the Equal Credit Opportunity Act (1974) and the Community Reinvestment Act (1977).
But the damage is still felt today. In 2021, the Department of Justice launched a modern anti-redlining initiative, and in October 2023, it announced it had secured more than $107 million in relief funds for communities of color affected by the practice. At the time, U.S. Attorney General Merrick Garland said the initiative was still actively investigating more than 20 cases of redlining across the country.
The Continuing Legacy of the Red Line
While there are no longer any official federal risk maps, unfortunately, bias can still creep into mortgage lenders' risk assessments. “Lenders may use algorithms and big data to determine a borrower's creditworthiness, which could lead to discrimination based on race or ethnicity,” Silver says. “Also, some real estate agents may steer clients away from certain neighborhoods based on their racial makeup.” This practice, known as steering, is now illegal.
Bias also affects the home appraisal industry, which takes into account a neighborhood's historical trends in property values, reinforcing redlining by keeping property prices low in historically Black neighborhoods, leading lenders to view them as a bigger risk when lending to those areas.
Even in the absence of conscious bias, the legacy of redlining and its effects on asset and wealth accumulation can put non-white loan applicants at a disadvantage. As a result, mortgages can remain harder for black borrowers to obtain, and even if they do obtain them, they can be more expensive due to higher interest rates.
Several studies link redlining policies to continued racial inequality. These include:
A 2022 study by FiveThirtyEight found that nearly all formerly redlined neighborhoods in the United States still have disproportionately black residents. Formerly redlined neighborhoods tend to have older housing stock and lower rents, and these lower-value assets contribute to racial wealth disparities. FairPlay AI's 2020 State of Mortgage Fairness Report found that mortgage lending equity has barely improved today compared to 30 years ago. In 1990, black mortgage applicants were approved for loans at 78.4% the rate of white applicants, but by 2021, that number had risen but remained at 84.4%. A 2020 National Fair Housing Alliance report found that black and Hispanic/Latino renters are more likely to be shown properties and receive offers than white renters.
“Redlining has kept Black and brown homebuyers out of the market for generations,” Saadeh said. “And even when people from these communities overcame barriers to homeownership, redlining reduced their ability to create wealth from their purchase. To this day, redlining reduces the property values of homes owned by minority communities. Redlining's lasting legacy is that it has denied people of color access to a path to economic independence for generations.”
What can help?
Our current housing finance system is built on the foundations left by redlining, and reducing the impact and legacy of redlining requires addressing the underlying biases that gave rise to the practice.
“This can be achieved through fair housing education and training for real estate professionals, increased enforcement of fair housing laws, and investment in communities that have been historically redlined,” Silver said.
Additionally, financial institutions could adjust their underwriting practices and algorithms to more fairly evaluate non-white loan applicants. For example, in late 2022, Fannie Mae announced that it would adjust its automated desktop underwriting system, widely used by loan officers, to consider bank account balances for applicants without credit scores. Fannie Mae and Freddie Mac may also consider rent payments as part of a borrower's credit history.
Of course, these efforts won't eliminate the effects of redlining overnight, but they could help more people achieve a key part of the American Dream.
How to file a complaint
If you believe you have been a victim of redlining or other housing discrimination, you can file a complaint with the U.S. Department of Housing and Urban Development online or by calling (800) 669-9777. You can also contact the National Fair Housing Coalition for assistance.
FAQ
What is the Fair Housing Act?
The Fair Housing Act, part of the Civil Rights Act of 1968, protects people from discrimination when renting, buying, or selling a home, getting a mortgage, applying for housing assistance, and engaging in other housing-related activities.
When did the Red Line end?
The Fair Housing Act officially banned redlining practices in 1968. However, despite being illegal, redlining and discriminatory housing practices continue to this day, many of which have been prosecuted by the Department of Justice.
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