What Redlining Had to Do With the 2008 Financial Crisis

At a Georgetown University forum in September 2008, then-New York City mayor Michael Bloomberg was asked about the major economic story of the day: the roots of the exploding global financial crisis. This was the month that Lehman Brothers had filed for bankruptcy and the federal government had placed Fannie Mae and Freddie Mac into conservatorship. What was behind the bust?

Bloomberg’s answer: The implosion of the nation’s housing market was the result of the prohibition of redlining, the discriminatory practice by which lenders denied African-American homebuyers access to loans in the same neighborhoods where white homeowners lived. “It all started back when there was a lot of pressure on banks to make loans to everyone,” Bloomberg said. “And once you started pushing in that direction, banks started making more and more loans where the credit of the person buying the house wasn’t as good as you would like.”

Bloomberg is now a Democratic candidate for president, and his campaign is working to reframe the former mayor’s comments, which the Associated Press resurfaced on February 12. The story arrived as Bloomberg tried to contain fallout from the revelation of a speech he made in 2015 defending the New York Police Department’s racist stop-and-frisk policy; he released a new statement apologizing for the policy on February 11. Campaign spokesperson Stu Loeser told the AP that, as mayor, Bloomberg fought predatory lending, and that as a candidate he has a plan to expand homeownership opportunities for African American buyers. CityLab reached out to the Bloomberg campaign and will update this story with any new comments.

But fair housing experts are pointing out that Bloomberg’s past understanding of the roots of the financial crisis matters a great deal now, since the next person to occupy the White House may be responsible for rewriting fair lending rules. And his comments point to enduring myths about race and responsibility—assumptions that both predate the financial crisis and persist today.

(Disclosure: CityLab was recently acquired by Bloomberg LP. Michael Bloomberg is the company’s founder and majority owner.)

“I think that Bloomberg’s comments are a kind of cynical way of shifting blame back onto communities that were most victimized by the unchecked practices within the banking and real estate industries in the late 1990s and through the early aughts until the crisis exploded,” says Keeanga-Yamahtta Taylor, professor at Princeton University and author of Race for Profit: How Banks and the Real Estate Industry Undermined Black Homeownership, in an email.

Bloomberg was hardly alone in his conviction that unqualified minority homebuyers triggered the financial crisis by being so susceptible to predatory lenders: That idea took root on Wall Street even as the meltdown was in process, according to historians.

The facts of the financial crisis, however, don’t fit an account that puts the blame on minority buyers or fair-lending reforms. More than half of the subprime mortgages originated between 1998 and 2006 were loans for refinancing, according to the National Community Reinvestment Coalition, a grassroots organization working to end discrimination in lending. Fewer than 10 percent of subprime loan originations went to first-time homebuyers.

“When people were looking for answers for why mortgages seemed to be falling into default at the rate they were, there were corners of the financial community that had a ready narrative about creditworthiness,” says Nathan Connolly, director of the Racism, Immigration, and Citizenship Program at Johns Hopkins University.

The foreclosure crisis dealt tremendous damage to black and Latino neighborhoods. But white investors were disproportionately responsible for foreclosures in minority neighborhoods, according to a 20112 paper from John Gilderbloom at the University of Louisville and Gregory Squires at George Washington University. Their research shows that, in Louisville, there were approximately 2,000 foreclosure sales each year in 2007 and 2008. This figure breaks down to roughly 39 foreclosures in black communities (measured as census tracts) compared to about 20 foreclosures in white communities. Yet on average, 15 of the foreclosures in black communities happened on properties owned by non-occupant white investors, while white communities saw on average just two foreclosures on investor properties.

The bipartisan U.S. Financial Crisis Inquiry Commission also concluded that fair-lending regulations were not to blame for the financial crisis (with one dissenting conservative saying otherwise). Bank of America’s then-chief executive Brian Moynihan defended fair lending law.

Still, commentators at Fox News and The Wall Street Journal’s op-ed page often insisted that lax standards that encouraged uncreditworthy minority borrowers were to blame. Former presidential candidate Steve Forbes and former Republican House Majority Leader Dick Armey propped up an astroturfed site, AngryRenters.com, that claimed to represent the voice of renters infuriated with mortgage bailout efforts. Fox Business’s Neil Cavuto said that “loaning to minorities and risky borrowers is a disaster.”

“It was a myth that tore around the country like wildfire,” says National Community Reinvestment Coalition CEO Jesse Van Tol. “It was a myth heavily promoted by a group of fringe conservatives who wanted to promote a narrative that something other than market forces caused the financial crisis.”

The Community Reinvestment Act, the 1977 banking reform law that ended redlining, remains a target of ire among conservatives and big lending institutions. The Trump administration has proposed changes to the rule that would streamline and vastly simplify what banks are required to do in order to meet fair lending standards. Civil rights advocates warn that Treasury is designing reforms that would water down the law.

Discriminatory lending practices did not end after the passage of the Fair Housing Act, a cornerstone of civil rights law passed after the assassination of Martin Luther King Jr. in 1968. Lenders in California in the late 1970s would write “COLORED” backward on mortgage applications—“DEROLOC”—in order to flag them for denials, Connolly says. Even today, more than 40 years after the passage of the Community Reinvestment Act, black homeownership rates are dismal. African Americans have rarely had the combination of living wages and non-predatory mortgages to support homeownership.

Another related myth informs Bloomberg’s worldview, or at least as he expressed it during the financial crisis, Connolly says—that credit scores convey an objective truth about renters or owners. Here Bloomberg has an opportunity, even in light of his gaffe, to embrace policies that will undo the “mythology of credit,” he adds. (In January, Bloomberg outlined his plan to boost black homeownership in part by pushing lenders to change their credit-score models.)

In the decades that followed the end of redlining, Taylor notes, lawmakers weakened the regulations meant to protect black communities from speculation and predatory practices. That made historically marginalized communities more vulnerable to predatory practices that emerged specifically to target these renters and owners.

“All of these factors would contribute to the notion that these were places that could be considered ‘risky’ and with risk came the supposed colorblind pretext that Black buyers should be treated differently: higher interest rates, more expensive loan products and all of the other tools of what I refer to as ‘predatory inclusion’ into the conventional real estate market,” Taylor says by email.

More than a decade out from the financial crisis, myths about its cause still endure. As do myths about work, welfare, safe neighborhoods, and credit risks. Wall Street is still susceptible to many of these myths. “The notion of the undeserving poor,” says Connolly, “migrated directly into the notion of the undeserving buyer.”

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Neighborhoods With a History of Redlining Are Hotter on Average

American cities face increasingly unbearable summers—but the heat isn’t distributed equally. Low-income and minority neighborhoods can get significantly warmer than their surrounding areas due to the urban heat island effect. These areas typically lack trees and other cooling infrastructure that provide shade during the day, and stay uncomfortably warm at night as the heat absorbed by impervious surfaces escapes back into the air.

A new study finds that these disparities correlate closely with neighborhoods that were subject to decades of housing discrimination through federal redlining policies that prevented African Americans from buying homes in certain neighborhoods during the New Deal era. In 94 percent of 108 cities that the researchers looked at, they found that historically redlined neighborhoods were nearly 5 degrees Fahrenheit warmer on average than non-redlined neighborhoods, though some cities showed starker differences—as much as 12.8 degrees.

“It’s been something that we [researchers] have recognized on a case-by-case level for many years, but we never ask, ‘how did it get to be this way?’” says Jeremy Hoffman, chief scientist at the Science Museum of Virginia, who led the study. “Our paper is the first to really establish that this is systematically related between cities, and partially explained by the historical policies of redlining.”

The finding adds to the body of research on how redlining has imposed decades of economic and health disparities on black and brown communities—in ways that are now being exacerbated by climate change.

Hoffman and his colleagues at the Virginia Commonwealth University and Portland State University compared satellite images of neighborhood-level surface temperatures with the digitized color-coded maps of the 1930s. That’s when the federal agency Home Owners’ Loan Corporation, in trying to revive the housing market, graded how risky neighborhoods were for real estate investment. Neighborhoods made up of largely low-income and immigrant or African American residents were deemed “hazardous,” or “definitely declining.” Whiter and wealthier communities were considered “best” or “still desirable.”

A map of redlining in Portland. Neighborhoods made up of largely low-income and immigrant or African American residents were outlined in red deemed “hazardous,” or colored yellow and labeled “definitely declining.” Whiter and wealthier communities were considered “best” or “still desirable,” and colored green and blue, respectively. (Mapping Inequality Project)

The researchers’ analysis shows that the gaps in temperature among neighborhoods were pronounced in southeastern, northeastern, and western cities. The largest disparities were in Portland, Oregon, and Denver, where redlined neighborhoods were roughly 12 degrees hotter than the “best” neighborhoods. Midwestern cities, meanwhile, had the least disparities between neighborhoods on average, which the researchers say is likely due to both the variation in how neighborhoods were ranked across the country and how land was used. Still, the largest metropolitan areas followed the national trend. In Minneapolis, the temperature difference varied, on average, by 11 degrees.

“We don’t claim that [redlining] caused this environmental disparity but they likely codified it, and turned the neighborhood disparities into law,” Hoffman says. Redlining prevented minority families from owning homes, fueling today’s racial wealth gap. They also led to decades of disinvestment in already-struggling neighborhoods, which helped shape the current built environment, exacerbating the disparities of the urban heat island effect.

Historically, wealthier neighborhoods were greener, with more parks and greater tree density to provide relief from the heat. That remains true today. Developers meanwhile, had more incentives to construct buildings and roadways through the lowest-income communities. In the mid-1900s, the federal government subsidized the construction of large building complexes in redlined areas, due in part to the inexpensive land. Those buildings, many of which still stand, were often made with materials that retain heat, like cinderblock and brick.

Then there was the Interstate Highway System, which was widely employed as a revitalization tool for struggling city centers during the 1950s and ‘60s; often, urban highways bisected poor and less-educated neighborhoods that couldn’t fight back against the massive project.

To advocates like Calvin Gladney of Smart Growth America, a nonprofit pushing for equitable and sustainable revitalization of communities, the finding isn’t surprising. But it can be “eye-opening” to local policymakers. “Redlining was banned in the ‘60s, and oftentimes people think there are no current-day ramifications,” he says. “But this study crystallizes that just because you take away a rule doing damage at the time, that damage doesn’t go away.”  

But this isn’t merely a design problem. Curbing the urban heat island effect isn’t just about looking at the data and building more shaded bus shelters or planting more trees in hotter communities—decisions often made separately by various departments. Rather, Gladney is calling for better coordination at the municipality level to understand the bigger picture about what communities of color need and how to include their voices at the table.

Climate change, he says, will only exacerbate those historic disparities unless equity becomes the “default” solution.

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CityLab Daily: The 2020 Candidates Take on Redlining

What We’re Following

In the red: As presidential candidates pitch national housing policies, several include proposals to reverse the damage done by redlining, the system in which government and financial market forces conspired to keep black people trapped in segregated and under-invested neighborhoods. Plans from Kamala Harris, Elizabeth Warren, and Pete Buttigieg would target help to homebuyers in neighborhoods once marked as “hazardous” in federal risk maps that still shape the racial wealth gap today.

But a new report from the Brookings Institution finds that those place-based policies may not address racial injustice the way the candidates intend, because many neighborhoods that were redlined in the 1930s no longer have the same racial make-up. CityLab’s Brentin Mock and Kriston Capps look at how each of the candidates’ plans would work and whether a more precise policy is possible. Read their story: Inside 2020 Candidates’ Plans to Address Redlining

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Will Presidential Candidates’ Plans to Address Redlining Work?

Several issues have gone missing so far on the debate stage among the Democratic Party’s presidential candidates, among them affordable housing and racial equity. This, despite the fact that living costs are going up while wages remain stagnant, and that the percentage of people—whites included—who believe that African Americans are getting fair housing opportunities, is at its lowest level in decades, according to Gallup.

So far, six presidential candidates have proposed policies that address both housing insecurity and historical racial discrimination in the housing market. Senators Kamala Harris, Elizabeth Warren, Cory Booker, and Bernie Sanders, along with South Bend mayor, Pete Buttigieg, and former U.S. Housing and Urban Development Secretary Julián Castro, have all submitted plans that specifically take a crack at addressing racial housing injustices. Some of them aim to reverse the damage done by redlining—the system in which government and financial market forces conspired to keep black people trapped in segregated and under-invested neighborhoods.

Some of those plans that target redlining propose offering down-payment assistance for certain first-time home-buyers in neighborhoods that were historically labeled as “hazardous” in the federal Home Owners’ Loan Corporation (HOLC) risk maps of the 1930s—the blueprints for redlining policies. Warren, Buttigieg, and Harris all offer this in the name of redressing and hopefully reversing redlining’s legacy, which is still keeping black families from building wealth today, according to numerous studies.

“A policy by any other name might be called reparations,” CityLab wrote earlier this year in reference to Warren’s plan.

That is indeed the idea, according to Mehrsa Baradaran, the University of California, Irvine law professor whose research serves as the basis for several of the presidential candidates’ redlining-aimed proposals.

Wrote Baradaran in her study “Jim Crow Credit”:

Most of the neighborhoods that were initially redlined in 1934 have been perpetually denied credit and thus remain pockets of poverty. Racial ghettos, once created, have had remarkable staying power. Across the country, these black ghettos are still the territories where the wealth and well-being gap are most drastically highlighted. These are the districts where poverty is still concentrated, schools are segregated, and properties continue to be devalued. By focusing a reparations program on geography as opposed to identity, policymakers can not only avoid the sacred cow of colorblindness, but they can link reparations with integration.

However, a new report from the Brookings Institution says that those policies likely won’t have the effect that the candidates think they will. Brookings fellow Andre Perry and research analyst David Harshbarger examined the current demographics of the residents who live in city neighborhoods that were redlined as “hazardous” in the HOLC maps and found that most of the people who live within those boundaries today are not African Americans, unlike when those zones were first drawn in the 1930s. Overall, there are more white and Latino people living in the formerly redlined neighborhoods today. Meaning, according to their analysis, that any policy based on the redlining maps would fail to comprehensively benefit black families—the demographic the plans seek to remunerate in the first place.

Of course, when looking closely at redlined neighborhoods at the city and regional level, there are still some that have a majority-African-American population today—Detroit, Birmingham, Cleveland, and Baltimore are a few examples. Chicago and Philadelphia have sizable black populations in their formerly redlined neighborhoods, but they still don’t match the white and Latino residential demographics in those zones.

Still, there is no region in which most of the formerly redlined neighborhoods have black populations comparable to when those red lines were first drawn. In the Northeast, the city with the highest percentage of black people still living in formerly redlined neighborhoods is Pittsburgh, where 36 percent of African Americans fit the bill.

However, formerly redlined neighborhoods do, in fact, still carry on the hallmarks of concentrated poverty and lower home values, according to the report.

“Clearly, these areas have suffered from a legacy of divestment, and deserve attention from policymakers,” the Brookings Institution researchers write. “But a strategy to close the racial wealth gap that focuses mainly on these now-diversified locations risks overlooking Black neighborhoods elsewhere.”

Many African Americans, particularly those of low-income, are now living in the suburbs of these cities, not the inner city, where the redlining most frequently occurred. Not only that, but recent federal housing policies, such as the replacement of public housing with mixed-income developments and the expansion of Section 8 housing vouchers, has dispersed black families across metropolitan regions while infusing more white residents into neighborhoods once almost exclusively inhabited by black residents.

Sociologist William Darity, director of the Samuel DuBois Cook Center on Social Equity at Duke University, anticipated this problem back in January when he told CityLab:

By avoiding making it a program that’s directed specifically at the families that either were living in neighborhoods subject to redlining, or families that indirectly lost income as a consequence of the impact of redlining given the existence of segregated residential areas, the bill is not designed to provide resources specifically to those families that were victimized. It actually gives resources to current residents.

The criteria for receiving down-payment assistance varies among the candidates’ plans. Warren’s housing plan is centered around the American Housing and Economic Mobility Act bill she introduced to the Senate last year. It would create a new HUD fund to help people buy homes in formerly redlined areas. This program would provide cash assistance for down payments to first-time homebuyers. To qualify, a buyer must have lived in the area for at least four years, and their earnings must fall within 120 percent of the area median income.

Harris’s approach is similar. Her plan would give down-payment assistance to homebuyers who live in areas that were subject to redlining or legal racial segregation. Unlike Warren’s plan, though, under Harris’s program, buyers could use these HUD grants to purchase a home anywhere in the country. They don’t have to be first-time buyers, although the plans requires buyers to use the home as a principal residence. Only buyers who have lived in a formerly redlined community for at least 10 years would be eligible for Harris’s program. And her legislation is meant to work with other bills to make credit scores more inclusive.

Buttigieg’s program is even more geographically focused. His plan would tackle hyper-vacancy, a term that describes communities plagued by very high shares of vacant properties—cities like Buffalo, Cleveland, and Detroit. Buttigieg’s plan would give vacant properties to homesteaders who would take full ownership over the houses as long as they occupied them for a decade. The homes would come with an extremely low-cost mortgage, payable directly into a homeownership fund, which would be used for improvement and maintenance for distressed properties.

Under the Buttigieg plan, only residents who have lived in designated pilot areas for three years and earn less than the area median income, or have lived in an historically redlined or segregated neighborhood for three years, can qualify for the program. Again, it’s a plan for building general wealth, not just redistributing cash: Homeownership is key. However, it is still subject to the same criticism that people who currently live in historically redlined areas are not necessarily the victims of decades of discriminatory lending policies.

There are other problems to plans based on homeownership in redlined communities. Many of the African American or Latinx families who live in formerly redlined communities don’t fit the profile of a first-time homebuyer, for example. They may own their homes now, or they may have owned homes previously. These residents may have been victims of predatory lending schemes or the foreclosure crisis. While a down-payment program targeted to residents from specific geographic areas might be a way to help some households build wealth (as opposed to a simple cash transfer), it is a near-sighted approach to making whole the victims of redlining, critics say.

There’s also the question of whether providing financial assistance for black families to purchase houses in formerly redlined districts would reinforce or even lock in the segregation that already exists—after all, it’s wealthy, white suburbs that need the integration and have the proximity to economic opportunities that black families could benefit from.

Baradaran addresses this unintended segregation problem by proposing housing vouchers for people looking to buy homes. Right now the federal government provides vouchers to low-income workers to rent apartments and houses on the private market. Baradaran proposes expanding the voucher system to allow people to purchase homes in any neighborhood, but helped along through a “shared equity mortgage,” wherein a private investor or government actor would jointly own the property with the voucher recipient. At the end of a loan term, the equity of the property would be evenly split between the homeowner and the investor, and in the event of a default, the investor would claim the property. But the vouchers would still be awarded to people who’ve lived in formerly redlined communities.

Baradaran also acknowledges that using the redlining maps of the 1930s might be suboptimal in capturing the black families intended for the benefit, because of changing demographics. But just because the players in these neighborhoods have changed doesn’t mean the game has.

“This does not mean that segregation patterns have been disrupted or that the same forces that created the racial wealth gap are still not in play,” Baradaran told CityLab. “What it means is that many communities have been re-segregated to new spaces and it’s usually not difficult to see how these formerly redlined populations have moved to different regions.”

Black people who once lived in redlined St. Louis have been priced out to suburbs like Ferguson; black folks in once-redlined, but now-gentrified Harlem were uprooted to places like the Bronx and Yonkers. Washington, D.C., was not covered by the HOLC maps of the 1930s, as the Brookings report points out. However, that doesn’t mean that no redlining occurred. As Greater Greater Washington reported in 2016, the organization Prologue DC created the Mapping Segregation in Washington D.C. project to show how certain neighborhoods, such as Mt. Pleasant, Columbia Heights, Park View, and Petworth, refused to sell houses to African Americans in the early 20th century. Neighborhoods in the southeastern quadrant of D.C., along the Anacostia River, became redlined for low-income African Americans by default.

“Some of the redlined areas are still intact, but many are not—that does not mean that we give up on a remedy; it just means we re-map these populations,” says Baradaran. “The Brooking authors are right that we need to look carefully at those borders, but I don’t think anyone that has proposed targeting these communities with housing subsidies has been under the impression that we would use the exact same maps. I helped several of the candidates with their policies and each one, we drafted the provision to help the people who were affected by housing segregation, not just the few redlined blocks.”

Whether the redlining maps of the 1930s align neatly with today’s maps of inequity or not, the problems and legacy of racist housing and investment discrimination still need to be addressed. A landmark survey released in August by The Groundwork Collaborative found that a majority of black adults believe that the economy is rigged against them in favor of the wealthy, and 50 percent of African Americans cited finding affordable housing near their jobs or family a challenge—a third said it was a “big challenge” in their lives. These are beliefs and attitudes that can’t be easily traced or shaded over. But this is also an issue that the nation can no longer afford to be colorblind toward.

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