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What Is Redlining In Real Estate? – Forbes Advisor

What Is Redlining In Real Estate?
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Redlining is the name given to a discriminatory lending practice that dates back to the 1930s when lenders drew red lines on maps around predominantly black neighborhoods as a way to refuse mortgages, claiming they were high-risk.

While laws beginning in the 1960s outlawed this practice, regulators will continue to cite lenders for similar behavior when their lending patterns discriminate against a protected class by denying them financial services (or charging higher rates or fees in some cases) despite They are also creditworthy applicants.

How did Redlining start

The main reason redlining was born was due to the 1930 government underwriting guide issued by the Federal Housing Administration (FHA), which insures some mortgages. The guide was so that lenders could assess the value of the property, based on demographics and location, as well as dictate to borrowers who qualify for mortgages that meet FHA criteria.

Banks have been reluctant to issue loans without FHA insurance, because having government support means they can share risk, while meeting criteria for engaging in safe and sound lending practices.

But the language used in the guide explicitly forbids lenders from working with minority groups, declaring that areas with “change in social or ethnic occupancy generally contribute to instability and deterioration of values,” for example.

As a result, he created a system in which lenders regularly reject mortgage loans based on where the applicant lives rather than looking at an individual borrower’s profile and creditworthiness.

How Redlining Was Stopped

Government policy encouraged redlining for decades until the civil rights movement of the 1950s caused Congress to pass laws prohibiting banks from discriminating against protected classes of borrowers in certain areas on the basis of race or gender. By the late 1970s, a law was put in place to incentivize financial institutions to meet the needs of disadvantaged communities through lending. Here are some of the main rules that prevent re-planning of mortgage lending.

Fair Housing Act

The Fair Housing Act was signed into law by President Lyndon Johnson in 1968 as part of the Civil Rights Act. As it relates to mortgage lending, banks are prohibited from discriminating on the basis of race, color, religion, gender, disability, familial status, or national origin if they:

  • Refusal to provide a mortgage or other financial assistance for the home
  • Refusal to provide information on loans
  • Develop different loan terms or conditions for a protected category, such as higher interest rates or service fees
  • Discrimination in estimating the value of the property
  • Conditioning the availability of the loan on the person’s response to the harassment
  • refused to buy a loan

Community Reinvestment Law

Even with the passage of the Fair Housing Act, discrimination against minority borrowers continued. Many banks also refused to open branches or provide their services in low- and middle-income communities.

In response, Congress passed the Community Reinvestment Act of 1977. It requires federal financial regulators to periodically rank financial institutions based on their efforts to meet the borrowing needs of all the communities in which they do business (largely dependent on branch locations), especially in low-lying areas. and middle-income neighborhoods.

The law seeks to incentivize banks by telling regulators to consider CRA performance and ratings when evaluating an institution’s application to expand operations or provide new services, including merging with or acquiring another lender.

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

Redlining in real estate today

Even with the passage of anti-redlining laws and several updates to the CRA, the financial system and housing market are still struggling with their red past.

Recent research published by academics at the University of Michigan, who examined the housing market in “marginalized” and “non-marginalized” neighborhoods that share a border, confirms this fact.

Looking at home sales data from 2000 to 2018, they found that residential properties “within the boundaries of the red striped areas” sold at a significantly lower price compared to homes “in the higher-rated areas” on the other side of the boundary. The study concluded that there are still negative effects on housing markets where the red line occurred decades ago.

If you were denied a mortgage by mistake

Discriminatory mortgage lending practices persist to this day, which is why some bank regulators and the Department of Justice joined forces in late 2021 to launch a helpline and website for individuals to report re-planning activity.

Individuals can report discriminatory lending practices by calling the Department of Justice’s Housing Discrimination Tip Line at 1-833-591-0291 or submitting a report online.

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