LENDER'S "DECLINING MARKET" LISTS - More and More Critics Crying Foul!
PURCHASING A HOME IN AREA LISTED AS "DECLINING" BY LENDERS MAY REQUIRE HIGHER CREDIT SCORES, HIGHER MORTGAGE RATES, AND MORE DOWN PAYMENT!
Under a precautionary program instituted last year by several large U.S. Mortgage Lenders, Zip Codes and Market Areas across the country have been either scored, rank-ordered, or otherwise identified as high-risk, "declining value" areas for the purpose of mortgage lending. There is no one definitive scoring system to identify and separate declining markets from those deemed stable. Indeed, banks have created their own proprietary scoring formulas derive their own "declining" label.
Here in Chicago, Countrywide Home Loans has scored our Metro Market a "2" - on the lower end of at 1 - 5 scale, where "5" identifies the markets most likely to decline. In other areas with declining market indicator scores, however, many borrowers have seen their required down payment be increased by 5% or more, or their fees or interest rates increase - often just a few days before their scheduled closing! (See our BlogChicagoHomes.com post from February 5th for more info, and links to the Countrywide Home Loans Soft Market List, as well as Kenneth R. Harney's Chicago Tribune article).
Assuming it is difficult for most potential borrowers, especially those with modest means, to quickly scrounge up another five or ten percent to close the deal on their home - often amounting to many thousands of additional down payment dollars required - critics to the new scoring program are mounting!
Today, many consumer and real estate industry groups, especially those representing minority interests, are making demands lenders either abandon or improve their market-scoring methodology. They are also encouraging Private Mortgage Insurance Companies - the insure loans to lenders where down payments are less than 20% of the purchase price - to follow suit.
A coalition of real-estate trade organizations representing African American, Asians, and Hispanics in the industry are asking for a flexible and transparent policy for assessing lender's risk in different market areas. The President of The National Association of Hispanic Real Estate Professionals, Timothy Sandos, says current policies may penalize huge geographic areas, even though certain neighborhoods or suburbs within these markets may show stability. Sandos prefers more weight on neighborhood-level evaluation of local price trends by property appraisers, as opposed to statistical models generated by a computer for a larger, potentially more diverse regional area.
Sandos continued that minorities and moderate-income borrowers may be inappropriately labeled by broad market trends models. These modest-income home buyers are often less able to increase their down payments and pay extra fees or increased interest rates. Taken together, this could further hurt the localized real estate market in many neighborhoods, scaring off other potential buyers, and perpetuating further price drops.
Mr. Sando's sentiments have been echoed by the National Association of Real Estate Brokers, which represents African American Real Estate Professionals, as well as The National Association of Realtors, the national real estate trade organization representing all real estate professionals in the U.S.
National mortgage underwriters Fannie Mae and Freddie Mac have guidelines which permit lenders to make exceptions to borrowers in their declining market areas on a case-by-case basis. Given the recent run-up in mortgage delinquencies, however, most lenders are reluctant to make many exceptions. Some have, however, based on a strong, reasoned individual property appraisal.
Brian Faith, a Fannie Mae Spokesman, says Fannie has "sought and received input" from consumer and industry groups. Faith said Fannie is "considering changes and refinements" in its policies, but has no details. Freddie Mac spokesman Brad German said, "we are always re-evaluating" policies.
In the meanwhile, the "Declining Market" tag remains a factor in many market areas, and will continue to impact the ability of many potential borrowers to close on their new homes.
For more details, read Kenneth R. Harney's article in today's Chicago Tribune.
DEAN MOSS & DEAN'S TEAM CHICAGO
