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"Redlining" was the practice in the USA during the Jim Crow era of mortgage companies not offering mortgages to black people. But if black people wanted to take out mortgages, it would seem that there would be money to be made by providing them. So why did redlining persist?

  • Was there an actual economic issue with black people and mortgages, e.g. the racism of wider society meant a higher probability of default?

  • Were the white company owners deliberately forgoing profit out of a sense of racial solidarity?

  • Were they afraid of reprisals (e.g. violence or boycotts) by the wider white population?

  • Or something else?

(I'm aware of the "contract for deed" system whereby black people could get loans for houses on very disadvantageous terms, including losing everything if you missed a single payment).

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    Not my DV, but it might be better on H.SE, unless you claims in persited to recent times. Anyhow, I'm not sure there's an "economic incentive" for racism. Economics assumes rational actors, but I'm not entirely convinced that cognitive model is suitable for racism... The latter Q would be suitable on econ.SE, in a more abstract setting. Mar 16 at 23:08
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    Redlining is not denying mortgages to black people federalreservehistory.org/essays/redlining Redlining is denying people access to mortgages based on where they live. It was historically used to deny mortgages to black people - however it didn't exclude black people outside the redlined zones and it did exclude white people inside the redlined zones. That was the point. It was secondary racism. Mar 17 at 20:18
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    Is it really "secondary" racism if your primary purpose is to exclude black people, and you do it in a way that doesn't explicitly delineate the fact that you're doing so? That sounds like primary racism to me. Mar 18 at 19:57
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    @AmagicalFishy is it really racism at all if your primary purpose is to minimize risk? Bear in mind that forcing banks to lend to high risk borrowers gave us the subprime mortgage crisis. The way racism has been subtly redefined in recent years to mean any inequality of outcome is disingenuous. Mar 18 at 20:19
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    @user2647513 Do you have any evidence of that? I've seen it alleged, but AIUI the subprime crisis was due to mortgage companies choosing to provide mortages that would never be repaid and then bundling them up and selling them on with financial engineering that let chunks be sold as "AAAA" based on bogus models of default probability. Laws prohibiting red-lining had nothing to do with it. Mar 18 at 20:42

5 Answers 5

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Existing answers are missing critical points. Linking redlining to Jim Crow may be misleading because it wasn't just a Southern thing. It was practiced throughout the United States, not just in those states where formal Jim Crow segregation existed.

It should also be made clear that the reason it's called redlining is that it refers to the red lines drawn on maps, identifying neighborhoods where mortgage lending was considered risky. So in other words, it's racial discrimination by neighborhood as opposed to just by applicant. White applicants were also denied credit due to redlining if they wanted to purchase in a neighborhood where minority populations were seen to be increasing. So the economic logic was all about projected long term housing values in an area. Declining housing values would magnify the risk faced by banks.

An important part of the incentive for this racial discrimination came from the explicit racism of federal housing policy before the 1960s. The US Federal Reserve has a history page which explains the important role of the Federal Housing Administration (FHA) that insured a large share of mortgages:

The FHA began redlining at the very beginning of its operations in 1934, as FHA staff concluded that no loan could be economically sound if the property was located in a neighborhood that was or could become populated by Black people, as property values might decline over the life of the 15- to 20-year loans they were attempting to standardize. For example, the FHA's 1938 Underwriting Manual emphasized the negative impact of "infiltration of inharmonious racial groups" on credit risk. To limit that risk, it recommended restrictive covenants that prohibit "the occupancy of properties except by the race for which they are intended," which had become increasingly common in the 1920s. For the next few decades, the FHA generally favored loans on new construction in suburban areas rather than urban areas with older housing stocks or Black residents.

That article includes an FHA map with redlining for Chicago in the 1930s: Redlined map of 1930s Chicago

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    Also: due to the host of other racist policies present at all levels of government the redlined areas indeed tended to have worse price development than other places. So it (in part) became a self-fulfilling prophecy. The further denial of loans to improve those neighborhoods also meant that once established, going against redlining was indeed a financially bad choice
    – Hobbamok
    Mar 19 at 9:33
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    Sounds like making it illegal would have ironically helped enable gentrification.
    – T.E.D.
    Mar 20 at 14:58
  • Why couldn't the loan terms be changed so that the FHA loans would be "economically sound", or was it just a practical issue? I'm imagining a scenario where high-risk buyers must put down 50% of the purchase price instead of 5% - the bank loses nothing even if the property value falls by half and gets foreclosed upon. The implication seems to be that it's basically impossible to sell a profitable loan for an asset that's expected to decline in value, but why can't the lender adjust the terms until it is profitable? Is it that no one would accept such terms in practice? Mar 20 at 15:24
  • @NuclearHoagie I suspect if you look at the data you'll find some of that happening. The result was that when black and brown people did manage to get mortgages, they paid a lot more for them.
    – Brian Z
    Mar 20 at 20:09
  • @BrianZ That's sort of what I'm getting at. The bank can still stand to make money by offering outrageous loan terms, instead of offering no terms at all. There is always some deal that would make economic sense for the bank, even if that's with a 99% down payment, a 30% interest rate and 1-month term. I'm wondering if the terms that would make it worthwhile would run afoul of usury laws, or if they'd just never be accepted by another party. Redlining seems to imply there is no amount of money you could offer the bank to get a loan, but purely economically, there must be a "fair price". Mar 21 at 18:41
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For a strictly economic motivation, keep in mind that the Deep South during Jim Crow would have been prone to an aggressive version of 'white flight': whites moving out of areas that minorities were gaining footholds in, retreating to suburban or rural enclaves that were more racially homogenous. This would set up a damaging domino effect. Property values in these 'flight' areas would plummet; established mortgages would be abandoned, leaving the lender to foreclose on properties of much less value then their original selling price; foreclosed properties would be difficult to unload except to buyers with lower wealth and higher risks. Whatever a lender might gain by offering mortgages to minorities would be washed away as whites decided it was time to go, collapsing the housing market.

I'm not suggesting that redlining was a strictly economic consideration, or that the economic argument outlined above isn't intrinsically racist in its own right. but…

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    That's not redlining as such. The point of redlining was that even in majority black areas they couldn't get mortgages becausethose areas were outlined in red on the maps as undesirable. Mar 17 at 17:17
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In the Southern USA, you have to remember that those responsible for Jim Crow discrimination were the white capitalist class who collectively were in a position to control banks and fund mortgages.

The economic issue for them was not necessarily the admittance of blacks into the capitalist class, but the maintenance of a system as a whole which was capable of coercing black agricultural workers to work on extremely poor terms (verging on slavery, even after it was officially outlawed).

The terms for blacks had to be poor, because the white farm owners were largely competing to export food to the old world, where there was already abundant land locally, good infrastructure, and white agricultural serfs on much better terms in life.

The relative strength of numbers between white bourgeoisie and black labourers meant that the bourgeoisie proper needed a solid praetorian guard of middle class owners to direct and oversee exploitation and to be willing to lay down their lives militarily in defending the status quo against rebellion.

The bourgeoisie needed also to attract and retain white settlers from the old world who were capable of agricultural management (because of the skills and culture they brought from the old world, and which was not yet endemic in the USA), and they needed a slave class who were deprived of confidence and entitlement to the maximum extent so as to be more inclined to submit.

In the counterfactual where racism did not exist and all were exposed to raw market forces, you would have the prospect of whites becoming immiserated to the point they risked falling economically into the lowest slave class (at which point they would either flee back to the old world, or they would become dangerous radicals rather than genuinely exploitable slaves, and they would frighten and radicalise other whites who feared the same fate), and you would have the prospect of blacks achieving ownership and management and therefore emboldening the rest to aspire to the same and resist their subjugation. You would also, quite simply, risk the whites and blacks uniting together against the bourgeoisie proper.

So for as long as the bourgeoisie of the Southern USA was dependent on the extreme exploitation of black agricultural labour for profit, it was in their interests to insulate whites generally from the risk of falling into a status that could only cause them to be more radical, and insulate blacks from events that could only increase their confidence to resist and rebel against their intense exploitation.

So both very rich whites and middle class whites were broadly in agreement that racism was in their economic interests. Their ability to cooperate to achieve their shared interest doesn't need detailed explanation.

In terms of why a white defector (potentially a rich one) could not simply set up a bank which lent to blacks, it would be because they not only risked conventional violence to their person and property (from well-motivated assailants who potentially had everything to lose), but they also would have faced social ostracism, trade boycotts, and hostile legislation from local lawmakers even, for engaging in activity that would radically undermine capitalist interests if allowed to proceed.

If as a defecting capitalist you wanted to do non-racist business, you'd just move north.

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    That's a very interesting analysis. I've seen similar elsewhere, and its what actually triggered me to ask this question. Where I have trouble is the idea that the white bourgeoisie worked this out, agreed on it as a plan, and also took measures to punish defectors. I find theories where individuals just take the path of least resistance to be more plausible. As we look with the benefit of hindsight the logic looks very obvious, but I bet it wasn't so obvious in the late 19th century. Or, ... did they? Were there pamphlets published at the time promoting this? Or is this just speculation? Mar 17 at 14:25
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    @PaulJohnson, well it's quite obvious they were capable of organising to punish defectors. Moreover they didn't need a "plan" - what both rich and poorer whites had were intersecting (or at least overlapping) interests. They both profited from the exploitation of black labour, and from attracting continued settlement of whites with farm management skills. The rich also benefitted from the fealty of middle class whites, and the quid pro quo was reserved occupations for those whites and protection from market competition with blacks. (1/2)
    – Steve
    Mar 17 at 15:05
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    You also find these things sometimes take on a life of their own. Even when the rich would prefer to ease divisions and reintroduce competition, they can face backlash from the well-organised, politically-conscious middle class who have spent all their lives in security and will blatantly suffer from reform, and who therefore act autonomously to resist those reforms. The rich help create racism for their own ends, but it then becomes their master. (2/2)
    – Steve
    Mar 17 at 15:05
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    @Hobbamok, I think frequently, those analysing political behaviour assume that there must be explicit conspiracy (like contractual relations) between people. They often cannot comprehend that even autonomous individuals are capable of conceiving of their political interests, and are willing to act in furthering them on the assumption (with modest risk) that others with the same interests will also behave reciprocally. As a result of socialising together, people often become aware that others share their interests and are like minded about how to further them. (1/2)
    – Steve
    Mar 19 at 12:49
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    When socialising, they may also discuss the structure of their political situation and consider the implications of non-cooperative or ruinously-competitive strategies. So although they do not (always) explicitly conspire to follow a course of action, their minds become aligned on the courses of action they do and do not wish to see prevail in their environment (and they become aware that the other knows the same information as themselves). When they then come to make an autonomous decision, they are more likely to try to coordinate their response for mutual benefit. (2/2).
    – Steve
    Mar 19 at 12:50
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In many areas compacts or social norms prohibited selling homes to Black people; this was done because (broadly) racist whites did not want to live in neighborhoods alongside Black families or, more tangibly, have their children attend school alongside Black children.

As these compacts became legally unenforceable and/or norms disintegrated, there was a pattern where one home would be sold (often via subterfuge) to a Black family, and then there would be a flood of white families selling their homes at increasingly depressed prices; within a year or two the neighborhood might be 90% Black (with many homes converted to rental property) and sales prices might have dropped by 20% or more.

And it is not profitable to underwrite mortgages in neighborhoods with falling property values and, often, deteriorating municipal services, so banks rated neighborhoods by perceived value which often was simplified to "percent of Black residents."

(While this went hand in hand with Jim Crow segregation laws, redlining was practiced everywhere in the US, even by Federal agencies, not just in states with Jim Crow laws, and persisted even after those laws started being struck down. Redlining wasn't illegal until 1968.

The FHA began redlining at the very beginning of its operations in 1934, as FHA staff concluded that no loan could be economically sound if the property was located in a neighborhood that was or could become populated by Black people, as property values might decline over the life of the 15- to 20-year loans they were attempting to standardize. -- Federal Reserve

Even as of 2022 Black homeowners are twice as likely to default on their mortgages as white homeowners, (Atlanta Fed, PDF)

Note: In the US it is nearly impossible to disentangle the effects of racism and the effects of poverty.

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  • The funny thing is, once a neighborhood is predominantly black and the damage is done, it would be economically sound to start lending again. That didn't happen though, did it? Mar 19 at 17:07
  • Also, the economical response to (perceived or true) different risks for different groups of people, back then including groups of different skin color, would be to adapt the interest rate, not to stop lending. Mar 19 at 17:10
  • @Peter-ReinstateMonica Even today, Blacks are more likely to default on their mortgages than whites, and there was, in fact, a pattern in the early 2000s of steering Black applicants into higher interest and lower risk "predatory" mortgages of various types. But in earlier years the damage would be done by steering minorities into different types of financial instruments altogether, or simply by refusing to lend in their neighborhoods, rather than by adjusting interest rates by perceived risk.
    – arp
    Mar 20 at 5:51
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There's wouldn't have really been any economic incentive for racial discrimination. Unless the government compels discrimination based on skin color or ethnicity, businesses as a general rule are more than happy to serve anyone who pays them to. Redlining was government mandated.

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    – Community Bot
    Mar 19 at 9:14
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    You are completely ignoring the fact that once started, a redlined neighborhood would be in decline (at the least comparatively) because of a lack of investment meaning that anyone who would invest would see less returns (or more losses) than in other areas. Aka redlining created the economic incentive to continue redlining.
    – Hobbamok
    Mar 19 at 9:39
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    This is ahistorical; note that many of the anti-civil rights lawsuits were by businesses forced to serve black people. Businesses have often tried to maintain a exclusive clientele which historically often included a racial component. Businesses, sometimes organizationally, sometimes managerially, and sometimes at floor level, often judged people's wealth in part by their skin color.
    – prosfilaes
    Mar 19 at 20:20
  • This answer seems to be based on the (common) misconception that businesses operate "rationally" in the economic sense.
    – gerrit
    Mar 20 at 7:45
  • @gerrit, or to be more precise, the misconception that businesses are not controlled by owners whose political ideas are more about maximising the exploitation of the workforce class whilst maintaining sufficient political strength to continue doing so, not maximising the number of other exploiters they put out of business through earnest competition. It's still "rational in the economical sense" for the owner, because they get rich - it's liberal economics as an academic discipline which is in such poor shape that it cannot grasp this as "rational" behaviour amongst a class of owners.
    – Steve
    Mar 20 at 14:46

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