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How redlining kept Black Americans from homeownership decades ago — and is still contributing to the racial wealth gap today

How redlining kept Black Americans from homeownership decades ago — and is still contributing to the racial wealth gap today
  • As part of the New Deal, the federal government began insuring mortgages in the 1930s, a sorely needed shot in the arm for the housing market during the Great Depression.
  • But the lending practices that came to be known as "redlining" effectively denied credit to residents of predominantly minority neighborhoods.
  • Rising rates of home ownership were a big aspect of rising middle class prosperity after World War II, but redlining kept Black Americans from the same opportunity until the late 1960s. Instances of discriminatory lending continued into this decade.
  • A report by Redfin reveals how the practice of redlining is still contributing to America's racial wealth gap today.

The American Dream and home ownership have been closely linked since 1944.

In that year's State of the Union address, President Franklin Roosevelt described a "second Bill of Rights" that included "the right of every family to a decent home." And for about a decade up to that point, Roosevelt's New Deal had revolutionized mortgage lending, which would power wealth accumulation for the middle class for decades afterward.

But the racial wealth gap has also been a persistent feature of American life, as reported by Business Insider — the most recent estimate by the Federal Reserve estimates that white families have a median net worth nearly 10 times that of Black families. Black Americans' access — or lack thereof — to home ownership is a major factor in this gap. The national homeownership rate for Black families is 44%, versus 73.7% for white families.

For decades, it was harder for Black Americans to get mortgages because of "redlining," a policy that was baked into Roosevelt's own housing agenda. The Dept. of Housing and Urban Development (HUD) defines redlining as "the practice of denying credit to residents of predominantly minority neighborhoods." And it's still a factor in the longstanding racial wealth gap, a recent Redfin report found.

Black home ownership reached its highest point ever in the half-decade before the 2008 financial crisis, after President George W. Bush signed a law to encourage first-time buying. When the subprime crisis devastated the world economy, it also wiped out all the gains Blacks had made in the housing market.

Here's how the roots of today's housing and wealth disparities stretch all the way back to the 1930s.

How the New Deal government defined Black neighborhoods as an "undesirable population"

How the New Deal government defined Black neighborhoods as an "undesirable population"
President Franklin D. Roosevelt. Emma Fierberg

Mortgages looked very different in the 1930s, typically requiring a 50% down payment and repayment within five to 10 years, as opposed to today's common 30-year timeframe. In other words, mortgages in the 1930s weren't easy to get.

Around the early 1930s, the mortgage lending market was also dysfunctional. In 1932, things got so bad that 1,000 homeowners were defaulting on their mortgages daily, and the next year, half of all American mortgages were in arrears, per Investopedia. President Roosevelt's New Deal kickstarted various programs to get things working again — including the Home Owners' Loan Corporation (HOLC) and Federal Housing Administration (FHA) to provide federal insurance for mortgage loans.

Roosevelt's housing policy was ultimately successful. Nationwide home ownership rates rose from a low of 44% in 1940 to more than 60% within two decades, per census data, and they've basically stayed that way.

But there's a catch. The FHA and HOLC were set up before the civil rights era, and their guidance for mortgage lenders reflected and reinforced a segregated mindset. The HOLC in particular color-coded and divided residential neighborhoods across the country into four grades. Its "residential security maps" identified, among other things, neighborhoods that had an "undesirable population." And residents of those neighborhoods couldn't get access to credit. Basically, the government was telling lenders not to give out mortgages in Black neighborhoods.

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What it meant to live in a green, blue, yellow, or redlined neighborhood — and what that means today

What it meant to live in a green, blue, yellow, or redlined neighborhood — and what that means today
1937 HOLC map of Philadelphia. National Archives

The HOLC looked at 239 cities, and identified green "Type A" neighborhoods, mainly affluent suburbs; blue "Type B" for "Still Desirable;" yellow "Type C" for "Declining;" and the red-outlined "Type D" that would be risky for lending.

The redlined neighborhoods tended to be older districts in the inner city, and they were often also Black neighborhoods. Greenlined neighborhoods were made up mostly of white families. In fact, language within HOLC contracts explicitly forbade properties from being sold to anyone non-white.

Redfin found in its analysis of 41 major metro areas that the typical homeowner in a former "D" neighborhood has earned $196,050 in home equity since 1980 while the typical homeowner in a former "A" neighborhood has earned $408,073.

Redlining gained a new level of cultural currency in 2014, when Ta-Nehisi Coates' influential essay "The Case for Reparations" was published in The Atlantic. It made the case that the "plunder" and "theft" that defined slavery continued on into the 20th century and up to the present, only in contractual, institutionalized form, with redlining the main example.

The practice has also been covered in several books, recently in 2017's "The Color of Law," by historian Richard Rothstein, and earlier in 1995's "Black Wealth/White Wealth," and 1987's "Crabgrass Frontier."

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Redlining reforms were passed in the late 1960s and '70s, but its legacy is still felt today

Redlining reforms were passed in the late 1960s and '70s, but its legacy is still felt today
Jan Arceneaux (cq) and other members of South Central Los Angeles Coalition Against Bank Fraud and Redlining protest in front of Los Angeles County Courthouse in 1998. Ken Lubas / Contributor/Getty Images

Starting with the Fair Housing Act of 1968 and continuing with the 1977 Community Reinvestment Act, the federal government has attempted to root out its past redlining guidelines. But the impact of decades of discriminatory lending is still contributing to the racial wealth gap today, as Redfin reported.

Over the last 40 years, per Redfin, homeowners in redlined neighborhoods have earned 52% less in home equity. In addition, Black individuals who own homes are 4.7 times more likely to own in a former "D" graded neighborhood than a formerly "A" graded neighborhood. White individuals are only 1.5 times more likely to own a home in a formerly redlined area.

Since 1980, the report states, homeownership among Black families in "A" neighborhoods has dropped from 50.4% to just 44.0% by 2017, while the percentage of white families in "A" neighborhoods increased, to 71%.

"Black families who were unable to secure housing loans in the neighborhoods where they lived have missed out on one of the major ways to build wealth in this country. And even families who were able to buy homes in their neighborhood after redlining ended haven't earned nearly as much home equity as people who bought homes in neighborhoods that were considered more valuable," Redfin Chief Economist Daryl Fairweather said in the report.

"That has had a lingering effect on their children and grandchildren, who don't have the same economic opportunities as their white counterparts. Not only are Black parents less likely to have the resources to pay for higher education and help with other expenses, but studies show that children of homeowners are about 7.5% more likely to become homeowners than children of renters," she continued.

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Discriminatory lending still takes place

Discriminatory lending still takes place
Treasury Secretary and former OneWest Bank Chairman and CEO Steven Mnuchin. Reuters

A recent HUD settlement underscores that not only is the legacy of redlining still hurting Black Americans, but that the discriminatory practices from the 1930s continue to take place.

Last July, HUD finalized a settlement with OneWest Bank, having claimed that the California-based lender had "discriminated in the marketing and origination of home mortgages, as evidenced by the low number of mortgages it made to African-American and Latino borrowers relative to the demographics of the area and to the industry as a whole."

Current Treasury Secretary Steven Mnuchin was the chairman and CEO of the bank for part of the time period.

OneWest Bank's redlining practices lasted from 2014 until "at least 2017," according to HUD.

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