All You Need to Know about Redlining in Real Estate

Talia Lee-
July 04, 2024

The era of legally sanctioned race-based housing discrimination has ended, yet its effects persist today. Despite the removal of explicit laws, the legacy of practices and attitudes that historically hindered nonwhite citizens from attaining homeownership continues.

Even in contemporary times, segregation remains prevalent in many areas, and mortgage borrowers of color frequently face higher interest rates. These disparities can be linked, in part, to redlining—a federal policy implemented in the 1930s that systematically disadvantaged nonwhite buyers seeking to purchase homes. Redlining not only perpetuated racial biases but also had a profound and enduring impact on real estate practices in America.

Redlining, both in concept and practice, is often attributed to the federal Home Owners’ Loan Corporation (HOLC), a New Deal agency established in the 1930s to assist homeowners facing mortgage defaults and foreclosures. HOLC developed a system to assess the risk of lending money for mortgages in specific neighborhoods.

Using color-coded maps, HOLC categorized areas based on their lending risk. Neighborhoods marked in red were labeled as “hazardous” or high risk, hence the term “redlining.” These redlined areas typically had predominantly African American and minority residents, reinforcing racial segregation. Historians argue that private mortgage lenders and even the Federal Housing Administration (FHA) adopted or developed similar maps to guide their lending practices, often resulting in higher interest rates or loan denials for properties in redlined areas.

According to the Federal Reserve, the FHA’s 1938 Underwriting Manual explicitly highlighted the perceived credit risk posed by racial diversity in neighborhoods. This discriminatory practice, institutionalized and widespread, systematically disadvantaged minorities and low-income communities.

Sam Silver, an agent at eXp Realty in Santa Clarita, California, states, “This practice was pervasive and institutionalized, designed to discriminate against minorities and low-income communities.”

After World War II, the United States experienced a significant housing demand as many returning veterans sought to settle down and establish families. The Servicemen’s Readjustment Act of 1944 provided benefits to veterans, including low-interest mortgages backed by the government, which reduced risk for lenders.

“This lower risk resulted in reduced interest rates, enabling middle-class individuals to borrow money to buy homes,” explains Rajeh Saadeh, a real estate attorney in Bridgewater, New Jersey. “With these new lending policies and a larger pool of potential homeowners, developers acquired extensive suburban land just outside urban areas, constructing numerous homes that shaped today’s suburbs.”

However, many of these new developments imposed restrictions preventing Black Americans from purchasing homes there. Additionally, urban areas already populated by minorities were often redlined, rendering them ineligible for federally backed mortgages and, consequently, affordable housing options. This meant that people of color, including Black service members returning from military service, faced barriers in accessing loans for suburban homes or homes in their communities.

“Redlining was a systemic, institutionalized policy enforced by the government, mortgage lenders, real estate developers, and agents to deny Black people the opportunity for homeownership,” Saadeh emphasizes. “The consequences of this discriminatory practice have had lasting, generational impacts.”

Redlining officially came to an end with the passage of the Fair Housing Act in 1968, which specifically outlawed racial discrimination in housing-related activities such as renting, buying, selling, and financing residential properties. Additional protections were reinforced by subsequent legislation like the Equal Credit Opportunity Act in 1974 and the Community Reinvestment Act in 1977.

Despite these legal strides, the legacy of redlining continues to affect communities today. In 2021, the Department of Justice launched the modern Combating Redlining Initiative, aiming to address ongoing disparities. By October 2023, this initiative had secured over $107 million in relief funds for communities of color impacted by historical redlining practices. U.S. Attorney General Merrick Garland noted that the initiative remains active, investigating more than two dozen redlining cases across the country.

Although the federal risk map that once defined redlining no longer exists, bias can still infiltrate mortgage lenders’ risk assessments. “Lenders can employ algorithms and big data to evaluate borrower creditworthiness, potentially leading to discrimination based on race and ethnicity,” Silver explains. “Additionally, some real estate agents may steer clients away from neighborhoods based on racial demographics, a practice now illegal under the term ‘steering.'”

Bias also permeates the home appraisal industry. Appraisals, which rely on historical property value trends in neighborhoods, perpetuate redlining’s impact by suppressing real estate prices in historically Black neighborhoods. This scenario causes lenders to perceive higher risk in financing these areas.

Even in the absence of intentional bias, the enduring effects of redlining on asset accumulation and wealth accumulation continue to disadvantage nonwhite loan applicants. Consequently, Black borrowers often face greater hurdles in qualifying for mortgages and endure higher interest rates when they do.

Several studies have highlighted the ongoing racial disparities linked to redlining:

  • A 2022 study by FiveThirtyEight revealed that nearly all formerly redlined areas in the U.S. remain disproportionately Black. These areas typically feature older housing stock and lower rental rates, contributing to the racial wealth gap.
  • FairPlay AI’s “State of Mortgage Fairness Report” in 2020 indicated that mortgage lending equality has improved little over the past three decades. In 1990, Black mortgage applicants secured loan approvals at 78.4 percent of the rate of white applicants; by 2021, this figure had only risen marginally to 84.4 percent.
  • A National Fair Housing Alliance report from 2020 showed that Black and Hispanic/Latino renters were more likely than white renters to be shown and offered fewer rental properties.

“Redlining effectively excluded generations of Black and brown homebuyers from the market,” Saadeh emphasizes. “Even when members of these communities overcame the barriers to homeownership, redlining diminished their ability to build wealth from their investments. Today, redlining continues to depress property values in minority communities, blocking generations of people of color from accessing economic empowerment through homeownership.”

The current housing finance system continues to operate within the framework established by redlining. To mitigate the lingering effects of redlining and its historical legacy, addressing the biases that underpinned these practices is crucial.

“This can be achieved through education and training on Fair Housing for real estate professionals, stronger enforcement of Fair Housing laws, and targeted investment in communities that have historically faced redlining,” suggests Silver.

Moreover, financial institutions can play a pivotal role by adjusting their underwriting practices and algorithms to ensure more equitable evaluations of nonwhite loan applicants. For instance, in late 2022, Fannie Mae announced updates to its automated Desktop Underwriter system, widely used by loan officers, to consider bank account balances for applicants without traditional credit scores. Additionally, both Fannie Mae and Freddie Mac may now include rent payments in borrowers’ credit histories.

While these initiatives won’t erase the impacts of redlining overnight, they represent meaningful steps toward expanding access to homeownership, a cornerstone of the American dream.

If you suspect you’ve experienced redlining or any form of housing discrimination, you can file a complaint online with the U.S. Department of Housing and Urban Development at their website or call (800) 669-9777. Alternatively, you can seek assistance from the National Fair Housing Alliance.

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