Modern Day Redlining

The neighborhood grades assigned by the Home Owners' Loan Corporation in the 1930s were one step in a long line of racist policies that formalized segregation and perpetuated inequitable distribution of resources. While “redlining” today is illegal, other contemporary policies and practices have the similar effects of denying Black and Hispanic families access to neighborhood, housing and wealth-building opportunities.

Discrimination in access to mortgage credit has persisted in various guises to this day, whether through the provision of credit under predatory terms or through the disproportionate denial of credit, inhibiting Black and Hispanic families’ ability to become homeowners, build equity and accumulate wealth.

Before and during the subprime mortgage crisis, subprime loans were especially targeted at Black and Hispanic borrowers, even when they were financially qualified for prime mortgages, a type of “reverse redlining” (Faber, 2013). Racially segregated neighborhoods, previously denied credit, became a focus of lenders who differentially marketed risky subprime loans in these communities, eventually leading to disproportionate foreclosure rates of Black and Hispanic owners and those living in segregated minority neighborhoods (Reid, Bocian, Li, & Quercia, 2016; Rugh & Massey, 2010). Between the peak and the trough of the Great Recession, total housing equity wealth fell by over 70% for Hispanic households and 53% for Black households, compared to 41% for White households (U.S. Department of Treasury, 2022).

Since the subprime crisis, mortgage credit has become more difficult to access, especially for Black and Hispanic households. Hearkening back to historic redlining practices, some lenders still shun the provision of mortgage lending and other services in minority communities. The U.S. Justice Department has increasingly targeted such redlining through its Combatting Redlining Initiative, which secured more than $84 million in settlements from lending institutions between October 2021 and February 2023 (U.S. Department of Justice, 2023).

At the same time, multiple studies have shown that Black and Hispanic borrowers are more likely to be denied mortgages or to be offered higher-price mortgages than similar White borrowers and that interest rates paid by these minority borrowers are especially high in neighborhoods with a large share of minority residents (Bartlett, Morse, Stanton, & Wallace, 2022; Faber, 2018; Reid et al., 2017). However, most of these studies rely on publicly available datasets, which do not include information on credit scores, an important factor in underwriting decisions. Recent work by researchers with access to confidential underwriting data, which includes credit score and other information, has shown mixed results. Some have concluded that differences in denial rates and mortgage pricing between Black/Hispanic applicants and White applicants persist even after considering these other factors (Popcick, 2022), but others have found differences in denial rates to be minimal (Bhutta, Hizmo, & Ringo, 2022).

What’s more, even when Black households are able to achieve homeownership, they may be subject to inequitable home appraisals. Controlling for differences in housing and neighborhood quality, homes in predominantly Black communities were found to be worth 23% less on average than homes in communities with few or no Blacks. These differences limit Black owners’ wealth accumulation and their ability to draw on home equity to finance education and home improvements and to make other investments, including refinancing their home or obtaining other loans at lower interest rates. Furthermore, those metropolitan areas with greater devaluation of Black neighborhoods were found to have less upward mobility for Black children growing up there and to be more racially segregated (Perry, Rothwell, & Harshbarger, 2018).

Finally, restrictive zoning is one of the most powerful current methods by which opportunity is hoarded into exclusionary enclaves and segregation is reinforced and perpetuated. Throughout U.S. history, White property owners have fueled segregation and unequal access to opportunity by working through local governments to enhance their own resources and access to public benefits (Trounstine, 2018). Municipal fragmentation (which allows hyper-local exclusionary zoning) and zoning regulations such as density restrictions (for example, limits to the construction of multi-family housing) correlate highly with economic and racial/ethnic segregation and concentration of affluent households (Lens & Monkkonen, 2016; Menendian, Gambhir, & Gailes, 2020).

For the past century, discriminatory practices like these have maintained housing segregation, neighborhood wealth gaps and other inequities between White families and Black and Hispanic families. The recent attention given to redlining in policy circles is warranted and essential to righting historical wrongs, but policy researchers, makers and advocates should also be aware of—and work to counteract—these ongoing systems of discrimination that exist today.