What Is Redlining in Real Estate?

FT Contributor
An African American arguing with a real estate agent about redlining.
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Redlining is the unethical practice of systematically denying services to residents in a certain area. Companies engaging in redlining may refuse to offer services altogether or try to provide customers with worse rates based on their racial or ethnic background. Redlining is just one example of institutionalized racism in the United States.

Black inner-city neighborhoods are most often subjected to redlining, but it can happen to anyone. A study conducted by the National Community Reinvestment Coalition found that neighborhoods the government deemed “hazardous” in the 1930s saw an increase in the African American population over the next 40 years. The study also found that neighborhoods with low grades saw a consistent decline in homeownership, value, rent, and resident credit scores.

Redlining most commonly occurs in the financial services sector, including mortgages, student loans, credit cards, and insurance. It can also happen with certain retailers who price things higher in low-income neighborhoods than they would in higher-income neighborhoods where buyer competition is greater.

Any way you look at it, redlining is illegal. Learn more about redlining, how it can affect you, and what you can do to reverse the effects of redlining.

History of Redlining

Redlining has been around for years, dating all the way back to the 1930s. Roosevelt’s New Deal passed the Homeowners Loan Act of 1933, which included the Home Owners Loan Corporation (HOLC). This federal agency refinanced home mortgages that were in default or at risk of going into foreclosure as a result of the 1929 stock market crash.

The HOLC would use government bonds to purchase old mortgages, then make loans to a specific type of homeowner. Their loans were only available for farm residential properties that were not worth more than $20,000. By 1934, one in five mortgages was owned by the HOLC, but in 1936 the HOLC disbanded.

While the initial intent of the HOLC was to aid in the foreclosure crisis, the government wanted to avoid lending to high-risk borrowers. Therefore, the HOLC would mark neighborhoods with these borrowers in red, which is where the term “redlining” comes from. Residents in the red areas had less access to mortgages and were charged higher rates of interest if they were able to obtain a mortgage.

Effect of Redlining

Although many will attempt to dispute it, redlining has led to systematic inequalities throughout facets of society. This process affected the real estate market decades later. In 1968, the Fair Housing Act was created to prohibit racial discrimination in neighborhoods. This law does not prohibit redlining when neighborhoods are excluded based on geological factors.

Neighborhoods the government deemed as yellow or red were neglected by the HOLC bank, leaving these neighborhoods underdeveloped and underserved, while surrounding neighborhoods labeled blue or green were improved.

Today, you’ll find vacant homes on various blocks in neighborhoods that the HOLC marked red. These neighborhoods lack basic services like healthcare facilities and banks. In addition, these neighborhoods often lack job opportunities for residents.

Government redlining may have officially stopped in the late 1930s, but neighborhoods are still feeling the effects of it to this day. Additionally, redlining has led to a gap in Caucasian homeownership versus African American homeownership. This has expanded the racial wealth gap significantly.

How to Reverse the Effects of Redlining

There are certain policies governments can into place in order to mitigate the issues associated with redlining, but there are also steps you can take to lessen the effects of redlining in your own community.

To help reverse the effects of redlining, use the strategies below.

  1. Study the history of your area and invest in the housing stock through neighborhood revitalization programs. Unite the intermediaries responsible for making decisions in your neighborhood so that the best decisions can be made.
  2. Understand the importance of public transportation in providing access to jobs and services for low-income communities. Be supportive of initiatives that can improve the community and create opportunities for people of all backgrounds.
  3. If you are a developer, target your projects in previously redlined areas to create more jobs. Per the Affirmatively Furthering Fair Housing rule, local communities are tasked with identifying and eliminating concentrated poverty in areas previously redlined by the HOLC.
  4. Educate yourself or hire staff to oversee the reversal of implicitly racist policies. Having a knowledgeable team of people dedicated to correcting the effects of redlining can help put a stop to it once and for all.
  5. Connect with local banking institutions in previously redlined areas to encourage bankers of color to purchase homes.
  6. Relocate hazardous waste sites so they are more spread out and not limited to low-income areas. The presence of these kinds of facilities can deter people from wanting to move into those areas, so diversifying their locations can help create communities people want to live in.

If you feel you have been discriminated against because of your race and are unable to obtain reasonable financial loans or other services, you may be a victim of redlining. The National Fair Housing Alliance encourages you to report these practices and put a stop to redlining in neighborhoods once and for all.

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