Redlining: its history and lasting impacts

California law prohibits discriminatory lending practices so that the state may strive toward a healthier and more diverse real estate market. But it hasn’t always been that way.

The effects of discrimination in the mortgage and housing markets continue to reverberate in today’s housing landscape. Despite modern legal protections, homeowners in communities that lenders unfairly deemed “high-risk investments” in the past still contend with reduced access to credit and higher borrowing costs today.

This is a lose-lose situation for homeowners and real estate professionals alike. So, what can agents do to combat the lingering effects of discrimination in the industry? First, a little history lesson.

The history of redlining

One of the most insidious forms of discriminatory lending in California’s history is redlining. Redlining is the practice of denying mortgages and under-appraising properties in minority communities based on demographics. The Housing Financial Discrimination Act of 1977 outlawed the practice in California. [See RPI e-book Real Estate Principles Chapter 9]

Redlining emerged as a practice after the Great Depression when the federal government sought to limit foreclosures and stabilize the housing market by classifying communities on a scale from low risk to high risk for mortgage lenders.

The Home Owners Loan Corporation (HOLC) drew maps for over 200 cities nationwide between 1935 and 1940. The purpose of these maps was to color-code and document the creditworthiness of neighborhoods. The racial composition of neighborhoods was factored into the grades received, and often proved pivotal in assigning a certain grade.

The HOLC maps grouped neighborhoods into four classifications:

• Grade A: “Best” (colored green), described as the most stable, homogenous and in demand during good times or bad;
• Grade B: “Still desirable” (colored blue), described as somewhat stable and “still good,” posing an acceptable risk of default for mortgage lenders;
• Grade C: “Declining” (colored yellow), posing a high risk of default for lenders and described as becoming obsolete with expiring restrictions or a lack of them and “infiltration of a lower grade population;” and
• Grade D: “Hazardous” (colored red), posing the greatest risk of default for lenders and the least stable of all the categories.

Redlining has historically led to a decline in the quality and quantity of housing in communities that were deemed risky. Even though California outlawed the practice in 1977, the effects of the HOLC maps introduced in the 1930s persist today.

The lasting impacts of redlining

An August 2020 working paper from the Federal Reserve Bank of Chicago finds that the HOLC maps which contributed to redlining practices had measurable effects in subsequent decades. This includes reducing homeownership rates, home values and rents among neighborhoods with lower HOLC map grades like C and D, while also increasing racial segregation.

Over the 20^th century, redlined areas — those receiving D grades — became more Black than their bordering C-grade neighborhoods. The gap between D and C boundaries grew steadily from 1930 until the 1970s, before shrinking thereafter.

A similar pattern emerges in C neighborhoods bordering B neighborhoods. In fact, the effects on housing were more significant and longer lasting along the C-B boundaries than the D-C boundaries.

For example, the gap between C and B home values as of 2010 was 7.5 percentage points. The gap between D and C home values as of 2010 was 2 percentage points.

The paper demonstrates that the HOLC maps had economically significant negative effects on the lower half of the codes. It also reveals that yellowlining significantly impacts residents living in those areas. The negative effects on yellowlined areas were more persistent between 1930 and 2010 than they were in D-grade areas deemed hazardous.

What agents need to know about discriminatory practices

Federal and state laws exist to protect against housing discrimination.

The Federal Fair Housing Act (FFHA) prohibits the use of any discriminatory actions a seller, landlord or property manager might take against a prospective buyer or tenant based on an individual’s:

• race or color;
• national origin;
• religion;
• sex;
• familial status; or
• handicap.

California law also bars discrimination in the sale or rental of housing accommodations. California’s list of protected classes is more extensive than federal protections, with discriminatory practices prohibited based on an individual’s:

• race;
• color;
• religion;
• sex;
• sexual orientation;
• gender identity;
• genetic information;
• marital status;
• national origin;
• ancestry;
• familial status;
• source of income; or
• disability.

Discriminatory practices include:

• making an inquiry into the race, sex, disability, etc. of any individual seeking to rent or purchase housing;
• publishing ads or notices which indicate a preference or limitation based on any of the prohibited discrimination factors;
• use of prohibited discrimination when providing or arranging real estate mortgages and financing;
• a broker’s refusal to represent an individual in a real estate transaction based on any prohibited factor; and
• any other practice that denies housing to a member of a protected class.

An individual who has been the victim of discriminatory housing practices may file a complaint with the Department of Fair Employment and Housing, the California government agency which enforces anti-discrimination law.

Brokers have a duty to advise their agents and employees of anti-discriminations rules and conduct. The broker is not only responsible for their own conduct, but also needs to ensure their employees follow anti-discrimination regulations when acting as agents on their behalf. [See RPI e-book Real Estate Principles Chapter 7]

Though housing discrimination is outlawed in California, redlining’s effects yet linger. Legislation alone is not enough to stamp out the legacy of racism — it’s up to agents and brokers to do their part as shepherds of the Golden State’s housing market.

Want to learn more about this topic? Click an image below to download the RPI book cited in this article.