The Legacy of Redlining How Discriminatory Practices Shaped Today’s Real Estate Financing

In American history, redlining was among one of the policies that had a lasting impact on the entire real estate market. This discriminatory (currently banned) practice used to deny sanctioning home loans to people based on their color. This practice had long-lasting consequences on wealth building, communities and access to opportunities. Redlining is officially banned now, but its legacy continues to affect real estate financing. It has ripple effects on the way properties are financed, valued and built today.

What is Redlining?

It is the practice of denying loans to people as per the area they live, even if they personally qualify for the loan. Historically, people living in core urban neighborhoods and black-populated people were redlined. This word originated with the federal Home Owners’ Loan Corporation (HOLC). It was the government agency formed in the 1930s with an aim to highlight the people who were in default in mortgages and in foreclosure.  This corporation formed color-coded maps to decide whether the properties in particular areas were good candidates for investments. The red color in their protocol was considered as ‘hazardous’ or high risk areas. Redlined areas were usually composed of African American residents and other minorities. Many private mortgage lenders or even Federal Housing Administration (FHA) used similar kind of color coding to set loan criteria for these redlined areas, incurring either higher interest rate or not qualifying them for loan.

The rise of redlining and its impact

Redlining practice started when buying a home was considered as a fundamental part of the American Dream. Earlier in the 20th century, buying a home was easy for Black Americans due to lower rates primarily because of the discriminatory practices that restricted their access to financing and housing. Redlining perpetuated this inequality and put all efforts to exclude this community from homeownership benefits and wealth-building opportunities. The HOLC practice of redlining was racially motivated and is followed by other insurance companies, banks and financial institutions. These companies classified the neighborhood into two categories namely ‘desirable’ and ‘undesirable’ as per the racial makeup of individuals. This practice marked Black and Latino neighborhoods as red and most of the financial institutions denied them for mortgages, federal assistance and insurance.  This denial of homeownership opportunities meant that families of black communities were unable to build equity in property, which is a key driver of wealth for the United States. While white families came under ‘desirable’ areas and used to avail all the facilities of federal loan programs, families of color were forced to live in rented houses or in neighborhoods with limited access to facilities like school, services and jobs. Also, the property rates of redlined areas were undervalued, making it difficult for families of color to improve their financial condition. With time this resulted in poverty and inequality which you can even see in current urban areas.

Redlining has come to an end, but its effects can still be sensed

While officially this redlining practice has been ended because of the fair housing act of 1968, the damage it caused to the society can’t disappear overnight. The policies that were implemented on the families in the mid-20th century still have a negative impact on the targeted communities. Neighborhoods that were earlier considered as ‘undesirable’ continue to face barriers in investment and economic opportunities. While those that were ‘desirable’ experienced an increase in property value, access to capital and public services. This redline practice has resulted in racial wealth gap that is present today. As per the research by the U.S. Federal Reserve, the overall wealth of Black households is just 15% of that of white households. The prime reason behind this huge gap is the historical inability of Black families to accumulate wealth because of redline practice in the past. Also, many areas which earlier came under redlining are still experiencing social and economic challenges. As per National Community Reinvestment Coalition (NCRC), the past redlining areas are still facing issues like lower homeownership rates, less economic opportunities and higher poverty rates. This inequality practice in the past has given rise to the racial and economic segregation in American cities. 

Redlining fair lending and the path forward

In recent years, many financial institutions, policymakers and civil right organizations have put their efforts to reduce this economic gap through fair lending practices. The introduction of Mortgage Disclosure Act (HMDA) in 1975, and the Community Reinvestment Act (CRA) in 1977 was made to improve credit access of underserved communities and take necessary actions against the lenders for any discriminatory practices.

A step towards equity in real estate financing

The redlining legacy still exists today, but there is a hope for change. The most promising avenue is government push towards transparency in lending practices. With the usage of data like race and ethnicity, to know lending disparities, it is easy to find out the areas where discrimination is still practiced.  Also, with initiatives like community investment and cost-effective housing programs, it is possible to reverse the damage caused due to redlining. To change these practices, policymakers must provide access to budget-friendly homes, equitable lending practices and invest in historically underserved areas. Financial institutions must pledge to follow equity, diversity and inclusion throughout their lending process to ensure that all people irrespective of their color and race build equal wealth to fulfill the American dream. The redlining legacy is a reminder for every financial institution and other lenders to work in the direction of fair and equal practices to preserve the right of homeownership for every American. As the country is stepping towards equity in real estate financing, it is pivotal to erase this painful history and work towards an inclusive future.

Conclusion

Officially redlining has come to an end, but one can still feel it from the wealth accumulation and real estate financing of white communities. As the country is moving towards fair lending practices, it is essential for private lenders in Houston Texas and other locations to work for equal opportunities for all people irrespective of their background. Only with sustained efforts can we undo the hard caused due to redlining and can create an environment where every American will get a chance to thrive.