One example of redlining is a residential map of Chicago in which the western section of the city is shaded red. So, if a Black family from that area applied for a home loan, two things could happen. First, they would be much more likely to be denied the loan. Or they may be required to pay a higher interest rate than a White family from a non-redlined area.
How Redlining Works
Access to mortgages is one of the two most common ways of building generational wealth in the U.S. However, for many decades, redlining was used in conjunction with racially restrictive covenants as a way of keeping non-White citizens out of certain neighborhoods and perpetuating segregation. Neighborhoods were systematically graded using certain criteria such as housing price and conditions, transportation access, and closeness to amenities like parks. However, non-housing-related characteristics such as employment status, economic class, immigration status, and the ethnic and racial makeup of the community were influential factors as well. The color-coding system was used to divide neighborhoods into categories. Areas shaded in green were the most desirable. Any areas outlined or color coded with red were considered a high-risk category, and mortgages rarely got approved in those areas. It soon became clear that the neighborhoods deemed as the riskiest consisted of primarily Black and Hispanic residents.
How Redlining Began
After the Great Depression, many homeowners with mortgages could not repay their loans and lost their homes. As a result, mortgage lenders experienced high losses on loans and unstable property values. So, to limit foreclosures and stabilize the housing market, the federal government established several agencies as part of a “New Deal” initiative. These agencies included the Home Owners Loan Corporation (HOLC) in 1933 and the Federal Housing Authority via the National Housing Act of 1934, which provided mortgage insurance and home improvement loans.
The Home Owners Loan Corporation (HOLC)
The now-defunct HOLC created a set of guidelines for appraising residential property values. The guidelines were based on housing market conditions, economic characteristics, and neighborhood demographics. Mortgage lenders who wanted to secure financial backing from the government were required to follow the set guidelines. Banks and lenders used those guidelines to draw residential security maps for 239 cities across the U.S. These maps pointed out the riskiness of providing loans across neighborhoods.
HOLC Redlining Maps
HOLC agents would consult with city officials, loan officers, appraisers, and real estate agents to design maps that identified the lending risk for neighborhoods across the U.S. The communities were then color coded on paper maps known as “residential security maps.” For instance, neighborhoods coded with green were considered the best areas and represented the least amount of risk for lenders. Neighborhoods coded red were predominately Black and classified as the highest risk. Here’s an example of how properties were codified:
Green/Grade A (Best): The appraisal value of these properties was anticipated to increase or remain high. This rating also represented the lowest risk of default for lenders.Blue/Grade B (Still Desirable): These properties were anticipated to maintain their appraised value. This rating represented an acceptable default risk for lenders.Yellow/Grade C (Declining): The appraisal value on these properties was expected to decrease. This rating represented a significant default risk for lenders.Red/Grade D (Hazardous): These properties were older and sometimes near unattractive or unhealthy industrial areas and therefore considered to have minimal value. This rating represented a dangerous default risk for lenders.
How Redlining Impacted Black Homebuyers
Black homebuyers were disproportionately affected by redlining for several reasons. First, because the system’s racist framework favored White homebuyers, it was incredibly difficult for a Black homebuyer to get approval for funding in neighborhoods with high appraisal values that were anticipated to rise over time. Because lenders shut them out of these neighborhoods, Black homebuyers had to turn to unattractive neighborhoods that, in some cases, were situated near industrial sites. Prices were more affordable, but Black homebuyers ended up paying more in interest because the neighborhoods were deemed “risky” based on the age and condition of the homes and their proximity to industrial areas. Because of those higher rates, Black homeowners were left with very little financial wiggle room to take care of repairs and improve their homes. As a result, Black homeowners were caught in a vicious cycle purposely perpetuated by federal housing agencies and lenders in which their neighborhoods were suffering but there was very little they could do to improve or escape their situation, while White homebuyers, which the system unjustly favored, enjoyed rising property values and low interest rates.
Redlining and Contract Buying
The practice of contract buying worked hand in hand with redlining to obliterate the generational wealth of Black homeowners and often left them without any equity. In contract buying, the buyer would make a down payment and monthly installment payments, which were often unfairly inflated by unscrupulous sellers who wanted to take advantage of Black Americans. The seller would keep the deed to the home and require the homebuyer to meet a series of often unfair and discriminatory conditions before the deed was passed over. Shut out of nicer neighborhoods because of redlining, and fighting against a lending system that often made mortgages either too expensive or impossible to get, Black homebuyers, particularly those in Chicago, turned to contract buying as a last resort. If the homebuyer violated any conditions of the contract—say, being late on a mortgage payment just one time—the house’s owner could kick them out. The homebuyer would lose their down payment and all of their installment payments. Furthermore, because they didn’t own the deed to the home, the homebuyer wasn’t entitled to any equity the house achieved while they lived in it.
The Greenwood Massacre
Even when Black homebuyers were able to build, against purposely unfavorable odds, a thriving community of homeownership, they faced the constant threat of harassment and violence. Greenwood, a neighborhood and business district in Tulsa often referred to as “Black Wall Street,” met its demise in 1921 when White mobs set fire to Greenwood and the national guard imprisoned more than 6,000 of its residents. Thirty-five city blocks burned to the ground, and it’s believed that as many as 300 people died as a result of the massacre. Simply put, the act of homeownership—just owning a home and building wealth—could put the lives of Black homeowners at risk.
The Lingering Effects of Redlining
The scars of redlining are still visible across the U.S. even to this day. Redlining has been a huge contributing factor to the wealth gap between Black and White Americans in several different ways:
Lower property values and decreased homeownership in urban areas predominantly populated by Black people can often be traced back to redlining. The inability to secure mortgages in some communities of color has led to an increase in abandoned buildings, which have become hot spots for criminal activity.Black homebuyers who could afford to invest in housing did not receive the same return on investment as White Americans. Black residents are more likely to rent instead of own homes.Those who could purchase homes were often not approved for home loans in suburban areas with high property values.
As a result of these redlining tactics, White Americans were more likely to leave an inheritance for their children with home values that increased about ten times above the purchase price. However, African American children were less likely to see significant inheritance from their property values. Furthermore, a study from the Brookings Institute found that homes in majority-Black neighborhoods are consistently valued 23% lower than homes with similar amenities in neighborhoods with few or no residents who are Black—that disparity in home value represents $156 billion in losses for Black homeowners.
Protections Against Redlining
It is illegal for lenders and creditors to discriminate against anyone based on race, color, religion, national origin, sex, disability, or familial status. If you believe a lender has discriminated against you or anyone else for any reason, you have options. Submit a complaint online with the Consumer Financial Protection Bureau by calling (855) 411-2372 and file a Fair Housing complaint at HUD.gov.
