Redlining

History and Process of Redlining

The practice of redlining dates back to 1930, when the Federal Home Loan Bank Board established high-risk areas in urban centers. High-risk areas pertained to neighborhoods that were occupied by racial and ethnic minorities, who were assumed to be bad risks for loans. Neighborhoods were then color-coded on residential security maps, and those areas that had a high concentration of minority residents were shaded in red. Such areas were then marked as high risk, and policies were not to be written by financial institutions. In particular, redlining disadvantaged older, low-income, and ethnic-minority neighborhoods. In a number of instances, redlining practices by lenders wrote off an entire neighborhood that would have otherwise been stable and viable.

Redlining discrimination can be defined by the deviation from cost-based pricing for a given borrower group. A nondiscriminatory lender will extend a loan to a borrower based solely on creditworthiness rather than by characteristics such as race, gender, or age of the potential homeowner. In the case of low-income and minority borrowers, lending institutions frequently deny mortgages and loans based on subjective reasons rather than creditworthiness. The deterioration of an entire neighborhood can occur when potential homeowners are consistently denied mortgage credit because of redlining; the practice can be considered a disinvestment in an urban community. Sources of discrimination can vary from a personal prejudice of the lender to a prejudice of the residents in a particular neighborhood to statistical discrimination where lenders use demographic characteristics.

A variety of factors influence the loan-granting process: the applicant's creditworthiness and other characteristics, such as race; the structural quality of the property; the composition of the neighborhood, including race and value of other properties; and the market demand for the type of mortgage the applicant is seeking. A potential homeowner can experience redlining at various stages of the home-buying process. Throughout metropolitan areas, both covert and overt practices of redlining have occurred, including higher down payments, higher interest rates, shorter loan maturity terms, and lower loan-to-value rates than required for properties in comparable neighborhoods. Thus, even if the borrower is granted a loan, discrimination can still transpire.

Blame is often placed on financial institutions, yet this discounts the many players involved in redlining, notably homeowners, speculators, developers, property owners, and realtors. A financial institution may decide whether or not to grant a mortgage on the basis of neighborhood conditions. Likewise, a lending institution may withdraw funds from a neighborhood its officers feel is declining. The denial of a loan or mortgage repeatedly in a given area leads to a change in the momentum of applicants, the quality of the neighborhood, and fluctuations in property value that [Page 1127]exacerbate risks associated with purchasing a home and approving mortgage credit.

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