What is Redlining in the World of Real Estate?

Understanding the Term "Redlining" in Real Estate

Redlining is a term that was dubbed dating back to the 1930s, defining a discriminatory lending practice that lenders used when drawing red lines on maps of neighborhoods that were predominately Black as a method to deny mortgage, as it was claimed as a high risk. As early as the 1960s, laws banned the practice, and regulators have cited lenders for similar behaviors when lending patterns show a protected class has been discriminated against being denied financial services. There are some accounts of higher rate charging or fees, even if these applicants are credit-worthy.

Continue reading to find out how redlining started to understand this real estate term better.

The History of Redlining

Redlining got its start in the 1930s when the government-issued "Underwriting Manual" by the Federal Housing Administration (FHA) insures mortgages. The guide was put in place as a precursor for lenders to assess the value of the property and dictate what borrowers were eligible for mortgage loans that meet the then-precarious FHA standards.

Bank lenders were reluctant to issue any loans without FHA insurance, as having the government backstop meant that the risk could be shared while meeting the standards of engaging in safe lending practices. The language in the manual deterred lenders from working with minority groups, as areas with a different social or racial occupancy were declared as contributing to instability, with a steady decline seen in values. Therefore, a system where lenders denied mortgage loans based on where an occupant resided rather than the borrower's credit was born.

How Redlining Was Stopped

Government policy encouraged redlining for decades up until the Civil Rights Act in the 1950s forced Congress's hand to pass laws that prevented banks from discriminating against classes of protected borrowers in areas of the U.S. based on the color of their skin or their gender. When the 1970s rolled around, a law was created to incentivize financial institutions to meet the needs of underserved communities through the process of lending. Below are the following main rules that now prevent redlining in mortgage lending.

The Fair Housing Act 

Signed into law by President Lyndon B. Johnson in 1968, the Fair Housing Act was a product of the Civil Rights Act. Because it relates to mortgage lending, banks are prohibited from discrimination due to religion, race, color, disability, sex, familial status, or national origin if they do the following:

• Deny making a mortgage loan or providing financial assistance for a home.
• Deny providing information regarding loans.
• Develop different terms for loans or conditions for a protected class.
• Discriminate in the value of an appraised property.
• Condition the availability of a loan on an individual's response to harassment.
• Deny to purchase a loan.

The Community Reinvestment Act 

With the passage of the Fair Housing Act, discrimination against minority borrowers continued. Banks even went as far as to refuse to open branches or offer services in low-and middle-income communities. In response to this defiance, Congress passed a new law in 1977: The Community Reinvestment Act. This required federal financial regulators to grade financial institutions based on efforts to meet the needs of borrowers of all communities where they provide business based on the branch location, especially when it came to low- and middle-class neighborhoods.

The law aided in instructing regulators to factor in CRA performance and ratings when evaluating an institution's application to expand operations, offer new services, or merge with or need another lender.

Depending, of course, on the type and size of a financial institution, CRA examinations are conducted by the Federal Reserve, Federal Deposit Insurance Corp. (FDIC), or the Office of the Comptroller of the Currency (OCC).

Is There Redlining in Real Estate Today?

Even with anti-redlining laws and updates to the CRA in place, the financial system and housing market struggle with cases of redlining. Home sale data from 2000 to 2018 found residential properties inside the boundary of redline zones have sold for far lower prices than the home was valued, compared to houses in higher-graded zones on the other side of the border. There are still some negative effects on the housing market where redlining occurred decades ago.

Conclusion

Despite the presence of discriminatory home lending practices today, bank regulators and the Department of Justice have joined the fight to launch helplines and easily accessible websites for individuals to report any activity they suspect as redlining. With great practices in place to prevent redlining, the chances of getting your dream home in the neighborhood of your choice are high. Trust the professionals at Benchmark Realty to guide you in finding and settling into your dream luxury home in the many affluent neighborhoods that make up Nashville, TN, today!