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Redlining Study Highlights Wealth Gap

April 30, 2014 By Sylvia O’Brien, Graduate Research Fellow

A recent study from the University of Minnesota Law School's Institute on Metropolitan Opportunity indicates some of the largest mortgage lenders in the Twin Cities area chose to forego giving loans to people of color or did so at subprime rates. The study found this practice happened at far greater frequency in predominantly black communities of Camden and Near North in Minneapolis. It also found that these disparities in lending were not tied to income and very high income Hispanic and black borrowers were actually more likely to be targeted with high subprime lending rates.

It is jarring to imagine the discriminatory lending practices of the pre-Civil rights era are still being used by large financial institutions. It is especially upsetting when viewed in the context of the wealth gap and the intergenerational financial instability that exists today due to redlining practices of that time.

The narrative of the post-World War II rise of the middle class, wherein the GI Bill led to a career and house in the suburbs, has applied largely to white Americans. The segregated higher education system of the time did not have the capacity to accommodate all black veterans that were eligible for a GI Bill. A college degree or job training was certainly no guarantee of middle income employment in the racially segregated work force of the 1950’s and 60’s (nor is it today). Black families who were able to secure the financial resources to purchase homes often faced barriers. They were denied access to credit, offered mortgages at subprime rates, and actively dissuaded from purchasing homes in neighborhoods of their choosing.

Systemic racial bias has meant that income and wealth are not correlated for people of color in the same way they have been for whites. In fact, the wealth gap is three times as large as the income gap is when comparing whites to blacks and Hispanics. Analysis of the wealth gap, separate from the income gap, shows whites are 19 times wealthier than blacks and 15 times wealthier than Hispanics.

Homeownership allows earnings to be translated into equity that can be passed down to future generations. When subsequent generations pay less for housing because they inherit a home they are free to invest that money elsewhere, allowing wealth to compound over generations. Estimations show wealth for whites growing at a rate of $5.19 for every dollar of income, while it grows at a rate of $0.69 for blacks.

If there is no inheritance the subsequent generation must start climbing the ladder to middle-class security from the bottom rung. They have also not had the same opportunities to make investments in assets like a vacation property or retirement accounts, which many middle class homeowners can leverage to buoy themselves when economic tides turn. In combination with banking practices that lock people of color out of re-financing or make them shoulder a subprime mortgage; these factors exacerbate foreclosure rates which impact the Minnesota housing market as a whole.

Generations of families were denied access to the economic stability homeownership provides, followed by a generation of egregious lending policy based upon race. Investigation of how lending institutions carried out these practices is underway, but knowing why they did it is just as important. We should examine assumptions the banks engaged in red-lining made that allowed them to follow through with this business model, and maybe the assumptions policy makers and advocacy groups made that allowed it to go on for so long. One wonders what we have lost as Minnesotans because a large segment of our population was unable to participate in our economy in an equal way.

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  • Mike Downing says:

    May 5, 2014 at 12:39 pm

    It is jarring that the writer does not have any memory from “the great recession” caused by sub prime loans to individuals who did not have the income, the down payment or the credit score to afford a house. People who cannot afford a house are called renters…