REDLINING MAKING A COMEBACK? Critics Cry Foul in New Lender Requirements in Certain Counties, Zip Codes!
COUNTRYWIDE HOME LOANS, OTHER LENDERS, MAY HIT CHICAGO BORROWERS WITH A 5% INCREASED DOWN PAYMENT REQUIREMENT!
Years ago, many lenders and insurance providers quietly practiced "redlining" - charging higher fees or premiums in areas thought to have declining housing values. Because many of these areas had a high concentration of minority home owners, the practice, most thought, was a thinly-veiled attempt at steering - in effect, deterring home investment in these neighborhoods. Some concluded the process self-fulfilling - many neighborhoods deteriorated because mortgage loans and home insurance was not easily available there. It was later banned as discriminatory.
Today, several lenders are using their own area scores, at the county or zip-code level, to assess increased down payment requirements for those who want to borrow against properties in these areas. Countrywide Home Loan's "Soft Market Index" ranks counties across the country 1-5, with areas scoring higher showing the greatest propensity for declining property values - currently Arizona, Nevada, parts of California, and Florida. For most borrowers here, the minimum down payment required for purchase has increased by 5%. For example, mortgages previously requiring 5 percent down, would now require down payments of 10%.
In all counties across the Chicago Metro Area, Countrywide has applied a "2" Soft Market Index. Here, and in other areas across the U.S. where Soft Market Index scores fall between 1 and 3, a 5% increased down payment may be applied if the home's appraiser indicates the immediate surrounding area around the subject home has an "oversupply" of homes for sale, or if the average market time locally exceeds six months.
Other major lenders have distributed their own lists of markets in decline. GMAC, based in Minneapolis MN, has developed a proprietary ResCap Index that allows it's loan officers to key in a zip code to see if it scores A, B, C or D. "C" and "D" scored-zips require higher down payments.
U.S. Loan Aggregator Fannie Mae has it's own scoring requirements for "down" markets as well. They also impose stronger down payment requirements in these "declining" market areas.
Vocal critics of this new scoring practice contend it penalizes all neighborhoods within a particular zip code or county - even if certain neighborhoods are not showing a declining price pattern.
David Berenbaum, of the National Community Reinvestment Coalition, feels "sound underwriting has nothing to do with geography. It is based on the income and qualifications of the applicant and the valuation of the property by a professional appraiser.
"Anything else," said Berenbaum, "is redlining."
Paul Skeens, of Maryland-based Carteret Mortgage has observed that lenders' county and ZIP scoring practices "have their heaviest impacts on areas with high proportions of minority groups and people with moderate incomes who bought houses" with low- and no-down-payment in the first half of the decade.
Labeling these geographic areas as "declining" and imposing punitively-higher down-payments "becomes a self-fulfilling prophecy," said Skeens. "People can't buy there because they need more cash upfront, the houses don't sell, and prices go down."
Countrywide Home Loan's Chief Credit and Operations Officer for Wholesale Lending, Brian Robinett, defends his company's practice, saying it cuts across all income levels, ethnicities, and property types equally.
See Kenneth R. Harney's article in last Sunday's Chicago Tribune for more information.
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