Mortgage Lending in Older Urban Neighborhoods: Lessons from Past Experience

At a time when policy initiatives of the Reagan administration are reducing government regulations and relying increasingly on private markets, a look at how home mortgage credit was supplied in areas redlined by institutional lenders offers a historical perspective on how the market works in credit-short neighborhoods. The evidence from Chicago shows that credit was available from professional investors using land installment contracts. But the cost to black homebuyers in these neighborhoods undergoing racial change was remarkably high. Investors realized high returns from race- as well as risk-related factors. Without sacrificing the high investment return, they shifted the lending risk to financial institutions. In effect, these institutions' only recourse was the value of the mortgaged property, the element conventionally considered most uncertain in these neighborhoods. The problems of an imbalance between lending risk and return highlight the importance of the structure of lending incentives as well as the availability of credit in these neighborhoods.