In the US, homeownership is the one of the main sources of most family’s wealth. And it is no secret that a fair and equitable housing market in the country increases stability and economic prosperity for most families. However, do you know that historically there have been illegal lending practices and discrimination. These have considerably hurt marginalized communities as well as neighborhoods in the US? Redlining is one of these practices.
We can define redlining as the discriminatory and illegal practice of denying various financial services, likes insurance and loans, to residents of specific areas. Note that the concept of redlining in real estate usually refers to the practices of financial institutions, such as banks, defining specific areas or neighborhoods, on a map as less or more desirable to lend to. It is worth noting that people who lived in redlined areas or communities were regularly denied mortgages, consumer loans, and insurance based on their neighborhoods before the passage of the Community Reinvestment Act (CRA) in 1977. Areas defined or marked by a red line were deemed to be areas or neighborhoods with a higher risk.
Although discriminatory practices existed in the insurance and banking industries before the 1930s, note that the New Deal’s Home Owners’ Loan Corporation (HOLC) implemented a redlining policy. They developed color-coded maps of various American cities, using racial criteria to categorize various insurance and lending risks. The policy of redlining is often felt the most by people residing in minority neighborhoods.
Redlining and other discriminatory practices tend to hurt homebuyers as they create an unfair housing market in the country. For example, if you are a homebuyer of color and working with an unethical real estate agent, they may only show you homes in black neighborhoods. As a result, you are likely to miss out on seeing a great house that could be considerably less expensive in another area of town.
Millions of black families in the country began moving from the South to various cities in the North after the 20th century. And the first Great Migration happened between 1910 and 1940. One reason behind the migration was the glut of nice-paying jobs.
The US federal government officially started to sanction racist and unfair home lending practices, especially in the late 1930s. And by 1936, HOLC had drawn up its discriminatory residential security maps. These maps outlined neighborhoods and areas the agency deemed had risky loan prospects. This is why “redlined” residents in the US had less access to mortgages. They also paid higher interest rates on their mortgages when they were able to secure mortgages.
The Home Mortgage Disclosure Act enacted in 1975 in order to help stave off redlining and other discriminatory lending practices. This law requires all lenders to track and frequently report loan-level data to the CFPB (Consumer Financial Protection Bureau). This is really helpful as it allows the CFPB and even the US Department of Justice to evaluate lending practices. It’s done on a regular basis and ensure borrowers are being treated equitably and fairly according to Fair Housing practices.
It is no secret that housing and lending discrimination are key problems that still exist. While redlining is illegal in the US, qualified mortgage applicants and homebuyers in communities of color often have lower odds of securing a mortgage than White Americans.