What Is Redlining?

For many Americans, homeownership is an essential part of achieving the American Dream, and for good reason. It’s used as a tool to build generational wealth and to provide a safe shelter for your family.

Unfortunately, due to redlining (and other discriminatory housing practices), minorities have historically been denied the opportunity to realize this dream. 

Sadly, although federal laws were passed in the 60s and 70s to make housing discrimination illegal, it still happens today.

Today, I’ll cover what redlining is in more detail, how to report it if you’ve been a victim of it, what its effects are, and discuss ways we may be able to fix it.

What is redlining?

Traditionally, redlining is the practice of denying, or not insuring, loans for creditworthy borrowers on the basis of their race or the neighborhood that they live in.

When a mortgage lender redlines you, it overlooks traditional factors, such as your income, credit score, and debt-to-income ratio.

Another form of redlining, often referred to as reverse redlining, occurs when lenders give borrowers unfavorable, or predatory loan terms and rates because of their race, ethnicity, or neighborhood.

A brief history of redlining in America

In the 1930s, a now-defunct company called Home Owners’ Loan Corporation (HOLC) was created under President Roosevelt’s New Deal.

Shortly after, the Federal Housing Authority (FHA) was created. These programs were designed to help Americans and private lenders find affordable housing.

Although the programs helped some Americans achieve homeownership, they didn’t benefit all Americans. During the HOLC, color-coded maps were designed to make sure these affordable loans didn’t get into the hands of African Americans and mixed-race neighborhoods.

The maps divided areas into four different colors:

• Green – used to indicate the best areas to lend money, usually predominantly white neighborhoods.
• Blue – used to indicate that an area is still desirable.
• Yellow – used to represent an area that was declining.
• Red – used to represent predominantly Black and minority neighborhoods and to label them as hazardous.

This practice of restricting mortgage loans by race and neighborhood was legal until the late 1960s.

The Fair Housing Act bans redlining

The Fair Housing Act is a federal law, passed in 1968, which bans housing discrimination on the basis of:

• Race.
• Color.
• Gender.
• Sex.
• Disability.
• Familial status.

Additionally, it protects you whether you’re renting or buying a property.

President Lyndon Johnson signed this bill into law, in part, to honor Reverend Martin Luther King, Jr., who advocated for fair housing.

Unfortunately, Dr. King didn’t live long enough to see this bill get pushed through congress — he was assassinated seven days before.

It’s a sad reality, but redlining still happens today

Although the FHA banned redlining, it still happens today.

In fact, while searching for reports of redlining, I read an article about the Consumer Financial Protection Bureau (CFPB) filing a complaint against a non-bank mortgage lender on July 15, 2020. 

The CFPB found that the lender made comments on the radio discouraging African-Americans from applying for their mortgage loans.

Why is redlining still happening across America?

There are three reasons why redlining still happens across America.

1. First, some lenders, like the one mentioned above, don’t want to lend money to minorities.
2. The second reason is this: some lenders want to line their pockets by targeting minority groups with predatory loans and unfavorable terms.
3. Finally, some lenders continue to devalue a person’s home based on their race.

The effects of redlining

Redlining is often cited as a cause for the wealth gap between minority families and white families, undervaluation of minority-owned homes, and segregation.

Wealth gap

Since redlining prevented some minorities from purchasing homes, affected families couldn’t pass down generational wealth to their children.

By contrast, white families largely benefited from favorable approvals, and the average price of their homes rising over time. As a result, a wealth disparity between minority and white families continues today.

According to a Survey of Consumer Finances report, Black families and Hispanic families only have a fraction of the wealth of white families.

*Based on data from Survey of Consumer Finances

How does the wealth gap affect minorities?

The wealth gap makes it more difficult for minorities to get ahead financially. For example, since minority families have less wealth than white families, they are more likely to take on more student loan debt. 

In fact, studies have shown that Black college graduates’ average student loan balance was $25,000 more than white college graduates. Having more debt makes it harder for minority families to increase their net worth.

Devaluation of minority-owned homes

Another devastating effect of redlining is that minority-occupied homes remain devalued, which further lowers the wealth of minority families.

According to a Brookings Institution report, African American neighborhoods were undervalued by an average of $48,000 per home. The report also states that children in undervalued neighborhoods are less likely to move up a social class.

Fear of having a lower appraisal when you’re a minority

Because homes in minority neighborhoods are often undervalued, some people fear their homes will appraise for less if the lender knows their race.

For example, before my girlfriend had her home appraised before selling it, she removed her pictures to hide the fact that she’s Black.

Her fears weren’t unfounded. I came across a few reports of Black homeowners getting a higher appraisal after removing traces of their Blackness or having a white person show the appraiser around.

U.S. homeownership rates by race over the last three decades

When researching the average homeownership rates in America by race, I found that the biggest homeownership gap exists between white and Black households. The percentage gap has been close to 30% for the past three decades.

Although the homeownership rate for Hispanic Americans has been a bit higher than Black Americans recently, a similar gap of almost 30% exists.

Asian Americans had a higher rate of homeownership than both Black and Hispanic Americans from 2016 to 2020.

*Based on data from the U.S. Census Bureau 

What to do if you realize you’re a victim of redlining

There are two federal laws that are designed to protect you from redlining:

• The Fair Housing Act.
• The Equal Credit Opportunity Act.

I discussed the Fair Housing Act earlier, and the Equal Credit Opportunity Act bans housing discrimination based on color, race, sex, marital status, and religion.

If you believe you’ve been redlined when applying for a home, file a complaint under one, or both, of these laws as immediately as possible.

You can file a complaint with the Department of Housing and Urban Development (HUD) by dialing 1-800-669-9777 if you decide to report the redlining incident as an FHA violation.

To report it as an ECOA violation, you’ll have to submit your complaint to the Consumer Financial Protection Bureau (CFPB).

Three strategies I think could help fix redlining

Although it hurts me to know redlining has had such a negative impact on minority communities, I’m hopeful that we as a nation can come up with some solutions to fix it.

Here are some potential solutions I found in my research:

Offer free homebuyer courses to disadvantaged communities

To help protect aspiring homeowners in disadvantaged communities from accepting predatory loans, we should offer free home buyer programs in underinvested communities.

These classes would teach students what their mortgage loan options are, how to compare them, and how to improve their scores to get better interest rates.

Down payment assistance programs

I think another solution would be to give money in the form of grants to families who’ve faced housing discrimination. A condition of receiving the grant could be completing the free home buyer’s course above or a similar program.

The down payment assistance could help lower a family’s monthly housing payments, freeing up more money to put toward other savings goals.

Reparations

Some people believe that reparations can help repair households that have experienced housing discrimination.

Evanston, Illinois, has been the first city to actually give reparations to families who’ve been victims of redlining and housing discrimination. The town voted on March 23, 2021, to give each impacted household $25,000 apiece.

Summary

Redlining has had a devastating impact on minority communities. It has made it harder for families that were discriminated against to save money and build wealth.

As a Black man, this saddens me. Although our nation’s racist past continues to haunt us, I believe we can right our wrongs.

I’ll leave you this powerful line from Amanda Gorman’s inauguration poem:

“It’s because being American is more than a pride we inherit,

it’s the past we step into

and how we repair it.”

Read more:

• Income Inequality – Why You Should Know About It
• Buying Your First Home? Make Sure You’re Financially Prepared With These Steps