Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California

Mary Cummins, Real Estate Appraiser, Animal Advocates, Los Angeles, California
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Tuesday, May 18, 2021

Redlining in home loan financing - Mary Cummins, Real Estate Appraiser, Los Angeles, California

UPDATE: 08/12/2023 AEI just posted an op-ed about redlining. It stated only 20% of people living in redlined areas at the time were black owners. I previously stated most who owned property in redlined areas were white. Now we know it was 80% which proves my point with research. Whites were primarily negatively affected by redlining because whites owned the property. This proves that blacks were not the target or "victim" of redlining.

This also shows that blacks and others were pushed into these areas because they were cheaper to rent. That is why they were drawn to those areas. No one corralled them into these areas. Poor whites, Latinos, newer immigrants were also in these same areas for the same reasons. Redlining did not cause the areas to deteriorate.

“Our results suggest that racial bias in the construction of the HOLC maps can explain at most 4 to 20 percent of the observed concentration of Black households in the lowest-rated zones. Instead, our results suggest that the majority of Black households were located in such zones because decades of disadvantage and discrimination had already pushed them into the core of economically distressed neighborhoods prior to the federal government’s involvement in mortgage markets.”

Redlining did not keep black people from owning homes. "However, there was a robust growth of black home ownership during the postwar era; continuously increasing from 21% in 1940 to 54% by 1980."

Another point is the condition of the homes in primarily black owned areas. They previously were middle class white areas which experienced deterioration and decline which is a natural real estate cycle. This made the properties cheaper and blacks and others were more easily able to afford to rent them. Some even owned them. Redlining didn't cause this. It's just a real estate cycle which happens all over the world. Blacks, Latinos ended up reaping the benefit of buying the depreciated homes when the areas went through the revitalization stage and greatly increased in value. They sold the properties at a large profit.

"Unlike the Oliver-Shapiro assertion that “their homes and communities deteriorated and lost value,” many of these black neighborhoods were previously upper-middle class ones. This filtering down housing process provided a financial foundation for many black families. And when the professional classes chose to repopulate some of these neighborhoods, black homeowners, including Washington DC’s Shaw district, reaped the gains from further housing appreciation."

Another interesting point is the wealth gap between whites and blacks. It's not caused by the median or average family wealth differences. It's mainly caused by the upper class wealth. I would bet that most of the overall wealth gap is driven by the 5% most wealthy people who are white. If you removed people worth over $5,000,000, the wealth gap would shrink immensely. It's probably the billionaires driving most of the wealth gap.

"The left-wing blogger Matt Bruenig found that if black households in the lower half of their distribution had their wealth raised to be exactly the same as white households in their lower half, the overall racial wealth gap would be reduced by just 3 percent. As a result, he concluded, “What this shows is that 97 percent of the overall racial wealth gap is driven by households above the median of each racial group.” Indeed, over two-thirds of racial gap reflects the differences in assets held by the top ten percent of households in each group. Class, not race is the major driver of wealth inequality. "

Another reason for the wealth gap is the difference in family structure. Couples have more money than single people.

"To be sure, racial disparities in home ownership rates persist. But a significant share can be explained by family structure. In 2022, overall black homeownership was 44 percent; but for married couples it was 64 percent, virtually the same as the overall white homeownership rate. "

ORIGINAL: Redlining - Definition: To refuse (a loan or insurance) to someone because they live in an area deemed to be a poor financial risk.
The National Housing Act of 1934 created the Federal Housing Administration FHA to help revive the US economy after the Great Depression. The purpose of the FHA was to provide affordable loans so people could buy homes. Private lenders would make the loans and the federal government would insure them for losses. The new loans would have lower down payments, smaller monthly payments and were more affordable.
President Roosevelt's New Deal created the Home Owners Loan Corporation to help process the home loans. "To facilitate private investment through the FHA, the HOLC, and the Federal Home Loan Board Bank (FHLBB), the federal government crafted a national set of standards for assessing mortgage risk. Through its 1935 City Survey Program, the HOLC gathered data about neighborhoods from approximately 239 cities and compiled the results into a rating system ranging from A to D. Communities with A ratings represented the best investments for homeowners and banks alike; B, neighborhoods that were still desirable, C, those in decline, and D, areas considered hazardous. "A" communities generally had access to better amenities such as better schools, parks, shopping, transportation and were therefore more desirable. "D" communities generally were located near less desirable features such as industrial properties and they had fewer and lower quality amenities." To visually capture these rankings, the HOLC then turned these ratings into color-coded maps, using green for A, blue for B, yellow for C, and red for D – the origin of the term “redlining.”

Many researchers have stated the HOLC maps were more a consequence of existing ordinary and discriminatory lending practices as opposed to being a cause for them. Still, the spatial isolation could make it a self-fulfilling prophecy over time. Many have stated the ratings were just a description of the current state of the real estate cycle for each neighborhood. A "D" area could be revitalized, redeveloped into a "B" area. If that area improved with the addition of more public transportation, parks, schools, shopping, it could become an "A" area. This is what has happened in downtown Los Angeles and other areas such as Boyle Heights which some refer to as gentrification. Areas which were in a then D zone are now a B zone. The reverse has also happened. Some areas which were B are now D. Real estate risk constantly changes.

Others have shown how the HOLC grades were more a function of factors such as housing condition, residential density, and housing type, as opposed to solely ethnic and racial composition. If the ethnic and racial compositions were not included in the maps, it would not have affected their accuracy in determining loan risk. Over time some of these ratings became more associated with race and immigration status than unbiased risk. The term "red zone" ended up having a connotation of POC, immigrants living in poor areas. Generally poorer people, people of color and immigrants lived in the C, D areas because it was less expensive. Over time the redlining caused less investment in C, D areas and more in A, B areas causing a greater divide between the areas. As people were pushed out of more expensive A, B areas and into C, D areas, those areas became A, B areas.

It must be noted that the actual HOLC maps never stated "D is a black area" or "D is an immigrant area." There were worksheets prepared by individuals which were used to determine the risk of each specific area. Those worksheets included many factors and descriptions including the following from top to bottom (see worksheet for an area of Los Angeles below), population, class and occupation, nationalities, income, sometimes "negro" %, building type, size, age, condition, owner/tenant % occupancy, home price bracket, sales demand, predicted price trend, sales demand, new construction, rate of sale of new construction, overhang of HOLC properties, description and characteristic of area. It's important to note that the maps only covered 239 cities. We have 108,000 cities in the US. The entire US was never mapped. Only .2% of cities were mapped, 1/5th of 1%. It's clearly impossible for the mapping of only .2% to affect all cities today.

Today in real estate appraisal and analysis we use all of the above factors except race and nationality. It's a violation of the Fair Housing Act to consider or mention race or nationality because it would be discrimination. All of the other factors are good indicators of value and trends. Now the US Census does include race and whether or not someone is "foreign born." The census has nothing to do with real estate sales or loans. It's a population study.

That said the areas ended up correlating with higher populations of POC, immigrants and poor people based on affordability. There is a direct correlation between income and POC. Whites make more than Latinos and Blacks. People with more money buy more expensive homes in more expensive areas. If the government wants to correct the wealth gap, they need to fix the income gap. Appraisers can't do it. If one were to note today property in the four distinct phases or life cycles of real estate, one would probably find a higher percentage of POC, immigrants and poor people in those same areas because hazardous, run down, less desirable areas have lower rent and less expensive homes to buy. In some areas, it's all poor white people. The correlation is income and wealth. People buy or rent what they can afford based on their income. Wealth is tied to income. Race correlates with income. The correlation is NOT race = home valuation. The causation is income.
The Fair Housing Act of 1968 made redlining due to race illegal. It became "unlawful to discriminate in the terms, conditions, or privileges of sale of a dwelling because of race or national origin." A bank could no longer refuse to make loans in certain areas based on those specific factors. Banks can only refuse loans based on the credit, credit history, income, assets, debts, expenses of the buyer, borrower. Those were the only factors that ever mattered in relation to risk anyway.

I am using this example below because it specifically mentions race, nationalities. Not all of the worksheets noted it. It was up to the individual filling in the form. The race, nationality had no effect on the rating. It was just reporting. They could have omitted it and ratings would have been the same. We know that race, immigrant status, being poor correlated with the lower C and D ratings because they correlated with lower income, lower net financial worth, lower credit ratings which affects affordability. This is not to say one caused the other. This is just to aid in the explanation of what "redlining" was.

Another important thing to consider is most people in the "redlined" areas were renters. Generally these areas are 80% tenants. The people who owned the property were mainly white. White property owners were the ones being denied loans or charged more for the loans. POC property owners were in the minority but they were also denied loans or charged more. And again this is only for government backed loans. People still got loans on the properties from sub prime lenders. We still have sub prime lenders today who do riskier loans. Those riskier loans are for riskier borrows or properties. A risky borrower has little cash, poor credit, lots of debt, shorter confirmed work history, undocumented work history, little income showing on tax returns, income only from retirement funds or investment property... A risky property is located in a wildfire area, higher risk flood zone, lava zone, tornado zone, next to river/ocean/lake, landslide area, on an earthquake fault, condo development with a major lawsuit, condo development with insufficient repair funds, older property, property not in average condition, property that needs seismic word, property with tenants that refuse to move, property that is behind on property taxes... Notice all these risk factors have nothing to do with race or color. These are just loan risk factors. Any safe bank would consider all of these risk factors especially if they are offering and reselling government backed loans.

Mary Cummins of Animal Advocates is a wildlife rehabilitator licensed by the

Mary Cummins of Animal Advocates is a wildlife rehabilitator licensed by the California Department of Fish and Game and the USDA. Mary Cummins is also a licensed real estate appraiser in Los Angeles, California.

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