A Systemic Analysis of Vestigial Racism in Housing Finance

Abstract

Systemic racism, which exists when minorities experience harmful outcomes from implicit or explicit bias, has recently been a much-discussed phenomenon. Systemic racism may exist, even though explicit bias is mostly illegal, because of structures of policy or behavior that generate deleterious outcomes. Bank financing for housing purchase or improvement is one such structure. An overtly discriminatory policy facilitated by an agency of the United States government, “redlining” on “residential security maps” depicted supposedly high-risk lending areas in red. These historical maps have led to low housing values today in formerly redlined areas. Even though the practice has been illegal for decades, traditional lenders nowadays decline loans in those areas because they are too small to be profitable. A system dynamics model shows the systemic structure of this situation. The model simulates various policies for its solution. Robust (but expensive) policies involve subsidies to lenders or lending from governments or nonprofits. Less robust but potentially cheaper policy would require lenders to make small loans anyway. Any of these policies would help break the adverse reinforcing loop of declining housing, inability to borrow to improve the housing, and further housing decline.