Here’s the problem: The National Housing Act of 1934, which established the Federal Housing Administration, also opened the door for banks and real estate professionals to create “residential security” maps that designated, with red lines, communities of color that were viewed as too risky to make loans—giving birth to the legal practice of redlining.
Even though redlining only applied to FHA-insured home mortgages, appraisers and banks used the maps to set value for all types of lending. Capital became much scarcer in redlined communities—and when supply drops, price increases. Higher prices deterred investment, deflating real estate values and initiating a decades-long cycle of wealth extraction.
Now, fast forward to 2022. Redlining was outlawed by the 1968 Fair Housing Act, and banks are now obligated to serve formerly redlined communities under the 1977 Community Reinvestment Act. But a child care provider applying for a loan to build a new center in a once redlined community will need an appraisal. Due to the lack of market investment, however, comparable sales—if any—are unlikely to support the building’s future “as-built” value. Some banks still might make a loan, but only for a lower amount (loan-to-value ratio limits) and/or at a higher interest rate (risk-based pricing). In the end, this child care provider will be forced to pay more, upfront or over time.
Simply put, old bank regulations like redlining drove down real estate values for decades in communities of color, and current bank regulations, such as appraisals and risk-based pricing, which still rely on those deflated values, have continued as barriers to investment. Legal or not, the outcome is the same. Communities are denied critical investment capital that doesn’t just contribute to racial wealth gaps, but also to racial gaps in educational attainment, health outcomes and food deserts, according to recent studies.