Red Lining and Investment

By Stephanie Diana Gast-Wilson

With the racial and gender tensions dominating in the news I felt it is important to talk about the concept of “Red Lining” in Mortgage. For those who are unfamiliar with the topic the term “Red Lining” is the phrase coined regarding red lines on a map of areas that have a dominant specific racial demographic that is not white. This concept was derived from the hypothetical concept of, “Cultural Affinity Hypothesis” in mortgage lending decisions.

In a nut shell it was hypothesized that during the 1950’s and throughout history there after women and people of color were being given a raw deal with higher Loan To Value ratios (LTV), required higher down payments, or were all together denied loans more often then white, male counter parts.

Although in the 90’s this theory was put to the test through surveys and the use of decoys much like “mystery shoppers” within the industry coupled with mass informational spread of the laws around this topic policies and procedures were put in place to attempt to prove and mitigate this issue. Also making laws and training employees yearly on these laws and reporting those in the industry they see breaking said laws. Although we still see evidence of Red Lining being a continual issue.
On the publication revisits the role race has played in the mortgage industry pertaining to the Boston Federal Study.

There is also a great article on this topic from the statistical perspective Even on Bloomberg Business at noted how in St. Louis it was noticed that economically disadvantaged minorities were not being offered credit through local banks. This cause the formation of the Saint Louis Equal Housing and Community Reinvestment Alliance, which; later brought on the 1977 Community Reinvestment act or (CRA), to require compliance training and regulations on this topic.

Although it has been argued that these loans that resulted from the CRA cause the housing crisis of 2008, which; as notes this just wasn’t so. As noted in one of my previous articles it was irresponsible lending where the risk in lending was thought to zero out because, the home could always be repossessed through foreclosure. By doing this lenders made it so that when this crisis came about so many foreclosures flooded the market that re-selling the units made them compete with themselves.
Though Red Lining is a hard thing to prove and as noted on

There are no precise quantitative estimates of the extent of predatory lending. But the growth of subprime lending (higher cost loans to borrowers with blemishes on their credit records) in recent years, coupled with growing law enforcement activity in this area, clearly indicates a surge in a range of exploitative practices. Not all subprime loans are predatory, but virtually all predatory loans are subprime. Some subprime loans certainly benefit high-risk borrowers who would not qualify for conventional, prime loans. Predatory loans, however, charge higher rates and fees than warranted by the risk, trapping homeowners in unaffordable debt and often costing them their homes and life savings. Examples of predatory practices include:
Balloon payments that require borrowers to pay off the entire balance of a loan by making a substantial payment after a period of time during which they have been making regular monthly payments;
Required single premium credit life insurance, where the borrower must pay the entire annual premium at the beginning of the policy period rather than in monthly or quarterly payments. (With this cost folded into the loan, the total costs, including interest payments, are higher throughout the life of the loan);
Homeowners insurance where the lender requires the borrower to pay for a policy selected by the lender;
High pre-payment penalties that trap borrowers in the loans;
Fees for services that may or may not actually be provided;
Loans based on the value of the property with no regard for the borrower’s ability to make payments;
Loan flipping, whereby lenders use deceptive and high-pressure tactics resulting in the frequent refinancing of loans with additional fees added each time;
Negatively amortized loans and loans for more than the value of the home, which result in the borrower owing more money at the end of the loan period than when they started making payments.

Though the system isn’t perfect we have seen evidence of real change brought on by the policy and procedures regarding Redlining. Such as all lenders are required to have employees trained and pass said training on what Redlining is and how to recognize it. Also pains have been taken to make it easier to report and show proof if redlining is found in the work place. Since the studies in the 1990’s and laws passed by the findings there has been real statistical proof of this issue being dealt with. However, it still occurs we should all do our part to prevent it. Racism and sexism weaken our investments and our country.


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