The other day, I was discussing the Countrywide soft market list and the Fannie Mae guidance notice with several colleagues and it made me wonder how long it would be before the issue of redlining came up.
Kenneth R. Harney’s column this week brought up the topic in his article Zip Code ‘Redlining’: A Sweeping View of Risk.
But first, some background…
There has been a lot of discussion and evidence of tightening underwriting standards for home mortgage applications. One of the most visible changes post cred-crunch of last summer has been the greater restrictions placed on underwriting standards in declining markets. In other words, a market that is experiencing price declines represents a higher lending risk since the home equity erosion provides the lender less collateral. Pretty straightforward.
This is not a new concept. Declining markets are to be accounted for in the measurement of risk by reducing exposure (size of the mortgage).
And its one of the cornerstone complaints I have held with the pressure of appraisers by the lending industry. Appraisers are often not allowed to characterize markets as declining or falling on their reports because it would “upset underwriting” and likely result in the eventually loss of the client.
Underwriting standards were expanded extensively and sloppily over the recent housing boom. Yet the restrictions now in place were employed almost overnight and will likely have the effect of damaging the very collateral they are trying to protect because they are often implemented in critical mass. In other words, a handful of lenders may dominate mortgages in a local market and their collective actions, when in sync, could have a significant adverse (and unintended) impact on local housing prices as a result.
The introduction of broadbased policies by GMAC, Fannie Mae, Countrywide and others will have the effect of restricting the number of sales, which impacts prices. In theory thats the way it should be, but broad based policy decisions based on questionable indexes or methods and after considering the virtual non-existence of standards last year, that it seems to open the door to accusations of redlining.
Labeling these areas as “declining” and then imposing higher down payment requirements “becomes a self-fulfilling prophecy,” Skeens said. “People can’t buy there because they need more cash upfront, the houses don’t sell and prices go down.”
The takeaway for now: If a major lender has tagged your Zip code, county or entire metropolitan area with a scarlet letter — and they exist in nearly every state, including many in places generally assumed to have relatively healthy market conditions — you’re going to need more cash upfront. That will be the case even if the risk designation has no real applicability to the house you hope to buy or finance.
Tags: Fannie Mae