What was the economic incentive for "redlining"?

Question

"Redlining" was the practice in the USA during the Jim Crow era of mortgage companies not offering mortgages to black people. But if black people wanted to take out mortgages, it would seem that there would be money to be made by providing them. So why did redlining persist?

• Was there an actual economic issue with black people and mortgages, e.g. the racism of wider society meant a higher probability of default?

• Were the white company owners deliberately forgoing profit out of a sense of racial solidarity?

• Were they afraid of reprisals (e.g. violence or boycotts) by the wider white population?

• Or something else?

(I'm aware of the "contract for deed" system whereby black people could get loans for houses on very disadvantageous terms, including losing everything if you missed a single payment).

Answer 1

Existing answers are missing critical points. Linking redlining to Jim Crow may be misleading because it wasn't just a Southern thing. It was practiced throughout the United States, not just in those states where formal Jim Crow segregation existed.

It should also be made clear that the reason it's called redlining is that it refers to the red lines drawn on maps, identifying neighborhoods where mortgage lending was considered risky. So in other words, it's racial discrimination by neighborhood as opposed to just by applicant. White applicants were also denied credit due to redlining if they wanted to purchase in a neighborhood where minority populations were seen to be increasing. So the economic logic was all about projected long term housing values in an area. Declining housing values would magnify the risk faced by banks.

An important part of the incentive for this racial discrimination came from the explicit racism of federal housing policy before the 1960s. The US Federal Reserve has a history page which explains the important role of the Federal Housing Administration (FHA) that insured a large share of mortgages:

The FHA began redlining at the very beginning of its operations in 1934, as FHA staff concluded that no loan could be economically sound if the property was located in a neighborhood that was or could become populated by Black people, as property values might decline over the life of the 15- to 20-year loans they were attempting to standardize. For example, the FHA's 1938 Underwriting Manual emphasized the negative impact of "infiltration of inharmonious racial groups" on credit risk. To limit that risk, it recommended restrictive covenants that prohibit "the occupancy of properties except by the race for which they are intended," which had become increasingly common in the 1920s. For the next few decades, the FHA generally favored loans on new construction in suburban areas rather than urban areas with older housing stocks or Black residents.

That article includes an FHA map with redlining for Chicago in the 1930s:

Answer 2

For a strictly economic motivation, keep in mind that the Deep South during Jim Crow would have been prone to an aggressive version of 'white flight': whites moving out of areas that minorities were gaining footholds in, retreating to suburban or rural enclaves that were more racially homogenous. This would set up a damaging domino effect. Property values in these 'flight' areas would plummet; established mortgages would be abandoned, leaving the lender to foreclose on properties of much less value then their original selling price; foreclosed properties would be difficult to unload except to buyers with lower wealth and higher risks. Whatever a lender might gain by offering mortgages to minorities would be washed away as whites decided it was time to go, collapsing the housing market.

I'm not suggesting that redlining was a strictly economic consideration, or that the economic argument outlined above isn't intrinsically racist in its own right. but…

Answer 3

In the Southern USA, you have to remember that those responsible for Jim Crow discrimination were the white capitalist class who collectively were in a position to control banks and fund mortgages.

The economic issue for them was not necessarily the admittance of blacks into the capitalist class, but the maintenance of a system as a whole which was capable of coercing black agricultural workers to work on extremely poor terms (verging on slavery, even after it was officially outlawed).

The terms for blacks had to be poor, because the white farm owners were largely competing to export food to the old world, where there was already abundant land locally, good infrastructure, and white agricultural serfs on much better terms in life.

The relative strength of numbers between white bourgeoisie and black labourers meant that the bourgeoisie proper needed a solid praetorian guard of middle class owners to direct and oversee exploitation and to be willing to lay down their lives militarily in defending the status quo against rebellion.

The bourgeoisie needed also to attract and retain white settlers from the old world who were capable of agricultural management (because of the skills and culture they brought from the old world, and which was not yet endemic in the USA), and they needed a slave class who were deprived of confidence and entitlement to the maximum extent so as to be more inclined to submit.

In the counterfactual where racism did not exist and all were exposed to raw market forces, you would have the prospect of whites becoming immiserated to the point they risked falling economically into the lowest slave class (at which point they would either flee back to the old world, or they would become dangerous radicals rather than genuinely exploitable slaves, and they would frighten and radicalise other whites who feared the same fate), and you would have the prospect of blacks achieving ownership and management and therefore emboldening the rest to aspire to the same and resist their subjugation. You would also, quite simply, risk the whites and blacks uniting together against the bourgeoisie proper.

So for as long as the bourgeoisie of the Southern USA was dependent on the extreme exploitation of black agricultural labour for profit, it was in their interests to insulate whites generally from the risk of falling into a status that could only cause them to be more radical, and insulate blacks from events that could only increase their confidence to resist and rebel against their intense exploitation.

So both very rich whites and middle class whites were broadly in agreement that racism was in their economic interests. Their ability to cooperate to achieve their shared interest doesn't need detailed explanation.

In terms of why a white defector (potentially a rich one) could not simply set up a bank which lent to blacks, it would be because they not only risked conventional violence to their person and property (from well-motivated assailants who potentially had everything to lose), but they also would have faced social ostracism, trade boycotts, and hostile legislation from local lawmakers even, for engaging in activity that would radically undermine capitalist interests if allowed to proceed.

If as a defecting capitalist you wanted to do non-racist business, you'd just move north.

Answer 4

In many areas compacts or social norms prohibited selling homes to Black people; this was done because (broadly) racist whites did not want to live in neighborhoods alongside Black families or, more tangibly, have their children attend school alongside Black children.

As these compacts became legally unenforceable and/or norms disintegrated, there was a pattern where one home would be sold (often via subterfuge) to a Black family, and then there would be a flood of white families selling their homes at increasingly depressed prices; within a year or two the neighborhood might be 90% Black (with many homes converted to rental property) and sales prices might have dropped by 20% or more.

And it is not profitable to underwrite mortgages in neighborhoods with falling property values and, often, deteriorating municipal services, so banks rated neighborhoods by perceived value which often was simplified to "percent of Black residents."

(While this went hand in hand with Jim Crow segregation laws, redlining was practiced everywhere in the US, even by Federal agencies, not just in states with Jim Crow laws, and persisted even after those laws started being struck down. Redlining wasn't illegal until 1968.

The FHA began redlining at the very beginning of its operations in 1934, as FHA staff concluded that no loan could be economically sound if the property was located in a neighborhood that was or could become populated by Black people, as property values might decline over the life of the 15- to 20-year loans they were attempting to standardize. -- Federal Reserve

Even as of 2022 Black homeowners are twice as likely to default on their mortgages as white homeowners, (Atlanta Fed, PDF)

Note: In the US it is nearly impossible to disentangle the effects of racism and the effects of poverty.

Answer 5

There's wouldn't have really been any economic incentive for racial discrimination. Unless the government compels discrimination based on skin color or ethnicity, businesses as a general rule are more than happy to serve anyone who pays them to. Redlining was government mandated.