Redlining in real estate has been going on at least formally since 1934, when the National Housing Act was created, which also established the Federal Housing Administration. According to the Fair Housing Act of 1968, which made redlining officially illegal, “redlining is the practice of denying a creditworthy applicant a loan for housing in a certain neighborhood even though the applicant may otherwise be eligible for the loan.”
Redlining: a brief history
1934: Although informal discrimination and segregation had existed long before 1934 in the US, “redlining” began with the National Housing Act of 1934, which established the Federal Housing Administration (FHA). Lenders had to consider FHA standards if they wanted to receive FHA insurance for their loans. The federal government instructed banks to steer clear of areas with “incompatible racial groups,” and recommended that municipalities enact racially restrictive zoning ordinances in order to deny loans to people.
1935: The Federal Home Loan Bank Board (FHLBB) asked the Home Owners’ Loan Corporation (HOLC) to look at 239 cities in order to create “residential security maps” to indicate the level of security for real-estate investments in each city. On the maps, the newest areas and/or those considered most desirable for lending purposes, were outlined in green and known as “Type A.” “Type B” neighborhoods, outlined in blue, were considered “still desirable,” whereas older “Type C” areas were labeled “declining” and outlined in yellow. “Type D” neighborhoods were outlined in red lines and were considered the most risky for mortgage support. These neighborhoods tended to be the older districts in the center of cities, and often they were also black neighborhoods.
1960s: Sociologist and community activist John McKnight first coined the actual term “redlining.” He said that redlining refers to the discriminatory practice of denying financial services (mortgage loans, home repair loans, etc) to residents of specific neighborhoods, generally because they are people of color and/or poor, and not because of their actual credit ratings or creditworthiness.
1968: The Fair Housing Act, which was part of the Civil Rights Act of 1968, prohibited discrimination against neighborhoods based on their racial composition. However, the law does not prohibit redlining when it is used to exclude neighborhoods or regions on the basis of geological factors, such as fault lines or flood zones.
1980s: Despite the Fair Housing Act, housing discrimination did not stop. For example, in Atlanta, reporter Bill Dedman showed that mortgage lenders would often lend to lower-income white families but not to middle-income or upper-income black families.
2017: Lack of access to credit, discrimination against minorities buying homes in green-lined neighborhoods, high interest rates, and being prevented from buying homes in their own red-lined neighborhoods have ultimately led to significantly lower homeownership rates for black families than white families, even for people with good credit. As of 2017, the national homeownership rate was still much, much lower for black families than for white families – 44.0% versus 73.7%.
Reverse redlining targets neighborhoods by selling products and services at higher prices than they are sold for in areas with greater competition. In mortgage lending, it’s the illegal practice of extending credit on unfair terms in a particular community on a discriminatory basis (based on the ethnicity of its residents). This is sometimes also called predatory lending.
What lenders can do legally
While redlining neighborhoods or regions based on race is technically illegal, lending institutions may however take several economic factors into account when making loans. And because lending institutions are not required to approve all loan applications on the same terms, this gives lenders a lot of leeway to possibly impose higher rates or stricter repayment terms on some borrowers.
What are lenders supposed to consider:
- Credit history – Lenders may legally evaluate an applicant’s creditworthiness as determined by FICO credit scores.
- Income – Lenders may consider an applicant’s regular source of funds, which can include income from employment, business ownership, investments, and annuities.
- Property condition – Lenders may evaluate the property itself, as well as the condition of nearby properties. This must be based strictly on economic considerations.
- Neighborhood amenities and services – Lenders may take into account amenities that enhance or detract from the value of a property.
- The lender’s portfolio – Lenders may take into account their requirements to have a portfolio that is diversified by region, structure type, and loan amount.
So while discriminatory practices can still exist, despite the laws, there are companies working hard to do things the right way. And there are options that are available in the present day to assist homeownership in traditionally low-income, red-lined areas. When you research your mortgage opportunities, make sure you do your research and due diligence to see if the lender you wish to work with has a history or not of discrimination, intended or unintended.
Saving any amount of money while protecting your hard-earned finances is critical. Prospective buyers and home-owners can minimize costs working with equitable and fair lenders like Gemtrago that don’t charge origination, application, or appraisal fees while still offering the lowest rates and highest level of service. They can definitely help you find the right mortgage loan to meet your needs.