4 In each city, neighborhoods were graded (and shaded) as follows: Mortgage lenders were required to follow those rules otherwise, they would not receive financial backing from the Federal Home Loan Bank Board.īetween 19, the HOLC used those rules to draw maps of 239 cities across the United States. This organization designed a set of rules to appraise the value of residential properties, taking into consideration local housing market conditions as well as neighborhood demographic and economic characteristics.

In 1932, as part of a broad effort to address the financial crisis brought about by the Great Depression, the federal government created several agencies tasked with overseeing the work of residential lenders. Neighborhood Maps and Residential Segregation As a result, lenders' losses from defaulted loans were high and general property values for borrowers in neighborhoods with many defaults were unstable. At the time, when lenders appraised the value of a home and assessed the default risk of a loan, they lacked good information about real estate values and borrowers' ability to repay. 3 In turn, the banks and financial institutions that had lent the money ended up with many real estate properties they could not sell without experiencing a large loss.

Nonetheless, real estate is not considered to have much liquidity, because it is not easily convertible into cash without losing some value in the process.ĭuring the economic contraction known as the Great Depression (1929-33), many mortgage holders could not repay their debts and lost ownership of their homes. For a mortgage loan, a house or another piece of real estate is offered as collateral, meaning the lender can seize ownership of the collateral if the borrower fails to repay the debt. 2 Default risk is the risk that the borrower may fail to promptly pay the interest or principal when due. When making a loan, the lender faces default risk. From 1968 to 1974, Congress passed several federal laws and policies preventing lending discrimination by race and gender, and the pattern of residential segregation started to change.īecause homes are very expensive assets to buy, when buying a home, people generally borrow money-in the form of a mortgage loan-to finance the purchase. Because the lending classifications determined individual access to credit, the residents of redlined neighborhoods paid high interest rates and had a hard time becoming homeowners and keeping their homes in good condition. In those maps, the neighborhoods most likely to default were shaded red and over time these neighborhoods had the largest concentrations of African Americans. The maps classified each neighborhood into one of five categories, from least to most likely to default on a mortgage loan. In the 1930s, the Home Owners' Loan Corporation (HOLC) drew maps of residential neighborhoods across the United States. If young people are not taught an accurate account of how we came to be segregated, their generation will have little chance of doing a better job of desegregating than the previous ones.

Mortgage defaults by race