What is Redlining? And Why Does It Matter in Real Estate

Written by Elijah BishopUpdated: 28th Dec 2021
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For millions of Americans, homeownership is regarded as the ultimate American Dream. Not only does it top the list of the biggest purchases many will make, but it also serves as one of the most patronized mediums to build and transfer wealth for many families. 

But what happens when a specific group of people is denied access to real estate properties and mortgage loans?

According to a report by Census Board, 75% of non-Hispanic white Americans were homeowners, 60% for Asian Americans, and just over 49% for Hispanic Americans.

The report further revealed that Black Americans were the least likely minority group to own a house, at just over 44% in 2020.

But the question on the lips of millions of minority groups members in America is, why the disparity?

The answer is simple, Redlining

Keep scrolling to learn more about redlining, its history, how it has affected American real estate, and steps you can take to prevent it. 

What is Redlining?

Redlining is a term that describes the discriminatory practice that puts financial and mortgage services out of the reach of residents of specific locations due to their race or ethnicity.

In the past, it was common for mortgage lenders to draw a red line around certain areas on a map to indicate areas that they considered as less desirable to lend to. 

Even if individuals from these redlined areas meet the necessary credit requirement applied to purchase a home in specific neighborhoods, they could be denied by lenders.

Redlining can also appear in lenders charging a higher interest rate for lending to a borrower in a redlined area due to their racial group.

And it can also look like realtors refusing to show certain neighborhoods or properties to individuals of minority groups. 

History of Redlining

While racial segregation in real estate has existed since the creation of what is now known as America, the term ‘redlining’ was coined by sociologist John McKnight in the 1960s.

Redlining was first introduced into the US housing scene after the Great Depression through the National Housing Act of 1934. 

In the 1930s, the Act gave rise to the Home Owners Loan Corporation (HOLC) and the Federal Housing Administration (FHA) to regulate the Housing industry.

The introduction of HOLC helped provide homeowners in danger of foreclosure with low-interest loans.

At the same time, the FHA was designed to give homeowners long-term government-backed home loans at lower interest rates. 

In 1935, HOLC created what is known as ‘residential security maps’ for 239 cities to guide lending decisions.

On the residential security maps, areas considered desirable by lenders were marked in green and were usually affluent white neighborhoods. These neighborhoods were considered less risky, and it was easier to get a loan in those areas. 

However, areas predominantly occupied by Blacks, Asians, and Jews were marked red and tagged hazardous.

Usually, these areas were characterized by old buildings and situated near industrial estates. As a result of the bias categorization of these areas, mortgages were denied to residents in the area leading to less homeownership and little to no real estate investments. 

In addition, cities bordering black-dominated neighborhoods were marked in yellow and faced discrimination regarding loan approval.

Effects Of Redlining

The unfair denial of real estate and mortgage services to individuals of certain racial groups affected the ability of these groups to receive affordable loans or invest in specific areas. Here are some of the effects of redlining. 

Lack of Access to Government-Insured Loan Programs

Housing and mortgage agencies like FHA and private mortgage companies employed HOLC redlining practices in their underwriting process.

This made it difficult for members of minority groups to access affordable mortgage loans offered by these agencies. 

Historian George Lipsitz, in his popular book, “The Possessive Investment in Whiteness,” iterated the clear financial discrimination between people of color and whites.

He hinted that non-white people received $2.4 billion of the $120 billion in housing financed by government agencies between 1934 and 1962. 

Unfair Housing Market

Discriminatory real estate, mortgage, and insurance practices under the umbrella of redlining create an unfair housing market.

Individuals of color, especially Blacks, found it difficult to purchase a house in specific neighborhoods.

And if you’re a person of color (Black) and work with an unethical realtor, they might decide only to show you homes in black-dominated areas. 

Also, it became difficult for homebuyers from minority groups to access the necessary financing to purchase a home in a redlined area even if they meet the mortgage requirements.

Historically, this meant that specific neighborhoods (majorly black neighborhoods) remained poor, underdeveloped, and destabilized. 

Disparity in Property Values

One of the issues discussed in the book “The Color of Money” was the disparity in property values caused by redlining.

Minority neighborhoods or redlined areas were characterized by liquor-lining (excessive liquor stores in lower-income and minority neighborhoods) and environmental racism (subjection to worse environmental conditions). 

Due to environmental racism and lack of financial investments, redlined areas faced a considerable difference in property values compared to white neighborhoods.

Decades after the ban of redlining practices, the effects are still felt in property values. In 1996, properties in areas redlined in the past were worth less than 50 percent of the homes in neighborhoods once considered more desirable by government agencies. 

How to Prevent Redlining: Our Call to Action

While changing decades of discrimination in the housing and mortgage industry doesn’t happen overnight, there are several little things you can do to prevent redlining.

Here are few ways you can stand for equal mortgage financing and housing within and beyond your location. 

Reach out to Your Congressperson, City Council & Mayor

You can start by calling or sending emails to your congress representatives to support bills that allow for more affordable housing for minority groups with supportive mortgage loan terms. 

Attend A City or Neighborhood Council Meeting

Yes, you can make your voice heard by attending your city or local neighborhood council meeting.

You can easily voice your opinion about discriminatory residential laws, inappropriate rent hikes, and other measures that may hurt people of color by attending in person. 

Support Anti-Redlining Organizations

You can go all out and support causes or movements fighting for fairness in the housing industry.

Organizations such as National Fair Housing Alliance and National Low Income Housing Coalition are many organizations focused on fighting against redlining. 

Report Housing Discrimination

Suppose you’re a victim or have witnessed housing discrimination based on race, either from a lender, insurance provider, or real estate agent. In that case, you can file a complaint with the Housing and Urban Development (HUD). 

What to Do If You Are a Victim of Redlining

If you’re a victim of redlining, you can file a complaint with the Housing and Urban Development (HUD).

You can call the Housing Discrimination Hotline at (800) 669-9777, print out a form, mail it to the nearest regional office, or file a complaint online.

You can reach out to your local fair housing center for support. For help with finding a fair housing center in your location, you can reach out to the National Fair Housing Alliance in Washington, DC.

It is common for Fair Housing Centers to send out inspectors to find out evidence of discriminatory practices in housing and mortgage lending. 

If you are experiencing or experienced mortgage lending discrimination, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) stating violations of the federal Equal Credit Opportunity Act.

You could also reach your state attorney general’s office to find out the process of filing redlining-related complaints in the state. 

>> More: Best Online Mortgage Lenders

Strategies to Avoid Redlining

Due to the increasing level of systemic redlining in the US mortgage industry, it has been more difficult for people of color or minority groups to buy a home of their choice.

If you’re a person of color or a member of a minority group, below are some strategies to avoid redlining. 

  • Research all available mortgages: By doing detailed research of the various mortgage types, their average interest rates, and eligibility requirement, you can reduce your chances of mortgage denial. 
  • Get Pre-Approved: Getting pre-approved for a mortgage gives you an idea of the home you can afford and proves to home sellers that you are serious. It also proves to sellers that you already have a mortgage lender ready to finance your home offer. 
  • Compare Rates from Different Lenders: Comparing rates across lenders can help you find the correct mortgage rate and terms. So, request quotes from at least four lenders to find the one with competitive rates. A good way is to compare loan estimates across lenders. 

Is Redlining Illegal?

The introduction of the 1968 Fair Housing Act and the 1977 Community Reinvestment Act (CRA) made redlining illegal.

The Fair Housing Act made it illegal for mortgage lenders, landlords, real estate agents, and even insurance providers to discriminate against individuals due to their skin color, race, sex, religion, and national origin. 

More importantly, the CRA made it compulsory for lenders to track how often they approve or deny loans to individuals of minority groups and low-income households.

While redlining practice has been officially made illegal in the US, there are still traces of reverse redlining (predatory lending practice) in the mortgage industry decades after the ban.

Bottom Line: What Is Redlining?

Even with the ban on redlining in the mortgage lending industry, there are still several traces of redlining practices that continue to affect the US real estate market.

Getting pre-approved and researching the different types of mortgages are some of the ways you can avoid the issue of redlining as a person of color. 

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.