What is redlining? Redlining is one of the most destructive things to low income America. Redlining is the practice of banks and government organizations declining service to low income Americans due to them being deemed “hazardous” or “risky.” Another form of redlining is “reverse redlining.” This is the practice of giving certain people (primarily black and minority people) worse loans, e.g. higher interest rates, subprime loans/mortgages, and general unfair terms. This makes it so they have a much harder time starting businesses, buying homes, or taking out loans.

Most banks use credit derivatives to reduce the risk of people not paying back loans. This makes them able to take more chances and give more people loans to start businesses, buy houses, and more. Many banks in low income communities don’t have a way to reduce the risk they take on themselves. This makes them much more cautious of who they give loans to. This, unfortunately, does not just apply to low income Americans, this applies for people of color too. Banks and government institutions are much more likely to deny people of color loans and general financial aid. Even the loans they do provide are subprime loans, which have a much higher interest rate.

These subprime loans started with the rise of the dotcom sites. These dotcom sites/businesses were eager to list themselves on the stock market during the late 90s and early 2000s. This lead to IPOs (Initial Public Offerings) to multiply on these things. This caused the dotcom bubble, which would soon burst. This burst created a risk of recession that was compounded by the attacks on 9/11. Large banks then tried to stimulate the economy after the fall of the world trade center. This stimulation would cause investors and lenders to give riskier investments. More subprime mortgages were given at this time, especially to people who would not be able to afford it. These subprime mortgages were packaged into MBSs (Mortgage-backed securities). The demand for housing caused the housing bubble to increase; a bubble which would then burst in the summer of 2005. This had a ripple effect causing the great recession from 2007-2009. In effect, reverse redlining was a major cause of the great recession from 2007-2008.

The history of redlining is rooted in racial discrimination where certain government organizations would make maps with low income communities (primarily black) highlighted in red. These communities were deemed “hazardous” and “risky” for investments. These communities were primarily black or minority. It was later outlawed to deny service on the basis of skin color. This change was good, but it started the banks common use of subprime lending, which is bad. The banks would then decide to give these people subprime loans or predatory loans instead of outright denying service.