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Warning! Sensative Mortgage Topic

This is a warning as it is a sensative mortgage topic. But, you can always count on me to "open up a can of worms" and stress my opinion. I received a disturbing email on Friday, informing me that a few MAJOR BANKS are rolling out new home loan guidelines to protect their ASSets...Or are they?

I saw the new guidelines in Black and White.

Like many other areas in the United States, California has been experiencing a higher level of forclosures and notices of default. As a result, these MAJOR BANKS are now rolling out new home loan guidelines, which give "RISK ASSESSMENTS" to specific counties that are showing signs of DISTRESS. Yes, counties that have higher notice of default levels,foreclosures and lowering property values.

Based on the category the county falls into, decides the max loan to value that the Banks are willing to write loans on.

To that, I throw this spin on the topic...

Is this not Redlining?

I believe it is. Back in the hayday, banks wouldn't lend money in areas that were populated by minorities. And now, it is coming back around in full scale!

Why? Most of the counties in California that were on the list had weaker job economies, which indirectly points to less educated individuals with lower income levels. It's not picking the color of a person's skin, but it is certainly picking out a demographic group!

What's your opinion on the topic?

Scott Gormley
Broker/Owner
Oak Valley Mortgage
2006 Chico Assoc. of Realtors Affiliate Chairman
Direct: 530.592.8362
Fax: 530.267.5555
Website: http://www.CALoan.com

Blog: http://www.CARealEstateBlog.com

"You find the perfect home, we'll find the perfect loan!"

Posted by Scott Gormley on 09/22/2007 01:28 PM

Comments (36)

redlining, redline, california home loan, california mortgage, california home loan underwriting, home loan guidelines, foreclosures

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36 Comments on Warning! Sensative Mortgage Topic

SEP

2007

Yikes, Scott. Great Post. I wouldn't be surprised if this got featured.

These guide changes certainly do open up to that kind of charge. I'm interested in seeing where this goes.

Hey Joey,

Long time no talk :)

Yes, this is a topic that should go on the rain for debate today. It's an important topic that should make its way up the political chain. Changes such as this will only add gas to a fire in certain areas of California. Is this fair to homeowners in those areas? Certainly not!

Hey Active Rain, it's raining right now in Southern California! Literally :)

Scott

Hi Scott, I find your posts interesting and have read several of them. On this matter, however, I don't believe it is redlining. The choice is made on a statistacal business model irrelevant of race, creed, color, sexual orientation, family, religion or gender. Just my thought.

Can you tell me how to write a post so that the text goes next to the picture? The only thing I can do is add a picture on top or on the bottom. Thanks for the help.

Scott, I think it is Redlining. I see things like this in a couple other areas too.

Scott - I don't think you can toss the flaming "redlining" label at the lenders on this one. If they were "redlining", the people in the areas you noted would not have received a long in the first place. If a lender makes loans based on credit worthiness, you can not go back later and accuse them of "redlining" if they have restructured their programs to reduce their risk.

You say that you feel that it is unfair to homeowners in those areas. Why are you limiting your angst to those areas. The over whelming fact is the reduced underwriting requirements in all areas has led to a situation that is, if not unfair, certainly carrying a negative impact on homeowners in every neighborhood.

Foreclosures do not just impact the family living in the home that is foreclosed upon. Foreclosures negatively impact property values in the entire neighborhood and as they become greater in numbers, entire towns will be impacted.

Lenders have every right to circle the wagons. Pointing out that the areas most impacted have weaker job economies does not automatically imply minority areas. Many of those areas also include long time homeowners that have remained as the neighborhood demographics changed around them.

"Redlining" is a rather emotional term to bandy about and using it in this fashion is not fair nor is it accurate. "Redlining" is based on a lender refusing to lend any mortgage money in a certain geographic area. The plan you mention says they will put a cap on what they will lend in certain areas. They can openly share this, which is full disclosure, or they could accomplish the same thing by leaning on their appraisors. Leaning on their appraisors is one of the things that got them in the bind that they are in. Revealing loan limits is just the result of fiscal risk management.

Scott

This is not the first time I have read a blog about this topic.

Another item on the mortgage topic is when a young couple wants to buy a home and have not established credit because they are young then they have the higher mortgage rates also.

Scott:

This is a question I have asked for years. The banks say it is not redlining because it is based on number of foreclosures in an area. Hmmmm........?

What is the definition of red lining then?

when i first moved to southwest fla we'd get rate sheets that would read 5% down, then in smaller print 10% in dad and broward counties. this has been going on forever.

I would have to agree. From what you have posted I'm not sure how they can get away with this. We will have to see how this shakes out.

I have heard of lenders having caps for certain loans in certain neighborhoods based on the same thing: risk assessment. They want to see a certain number of owner occupied, investment, etc and if there is too much of something going on in a (let's say) condo development, perhaps they couldn't get a loan. Would that be redlining too?

How is this all different than a traditional appraisal (that technically should) report area economic and real estate conditions in detail?

I do feel that risk assessment does need to weigh highly on types of loans structured. For example said applicant is getting an adjustable loan and said area or zip code has a high foreclosure rate consisting on adjustable loans.

My thoughts & opinion, I am not a lawmaker or enforcer, nor do I play one on AR :)

I have never thought of mortgage criteria by county as red lining. I have always thought of redlining having to do with neighborhoods or communities, a smaller area. Interesting discussion Scott.

Our counties are so diverse... there are very urban counties in Ohio and some very rural counties but I don't believe counties are all minorities. Isn't that what redlining is about?

I think most of the foreclosures in our state are probably in the counties with the big cities but I sure hope lenders wouldn't stop loaning in Franklin, Cuyahoga and Hamilton Counties because they have high rates of foreclosures in comparison to rural counties.

Interesting post and also comments (so Far). If my memory serves me correctly, if an appraiser classifies a home in a "Declining Market" the secondary market has a problem funding the loan. Would have to check that. I do not believe the banks move is Red Lining, I merely believe it to be a method of protecting itself by requiring additional rules to be followed. My though here goes to appraisers, I do know some lenders shopped appraisals in the past. And I believe those loans have the largest default percentages. Would our industry be as it is today, if quality control procedures were in place a few years ago.

Great topic to broach, Scott. I've seen these same risk assessment adjustments made time and time again in Southern California - after the Northridge Earthquake, firestorms, mudslides etc. - and the same risk assessment adjustments are in place today by several banks for the Antelope Valley, Temecula, Stockton As frustrating as these guideline adjustments can be, I don't believe it can be categorized as redlining.

Nothing like kicking an area when they are down. No money, no buyers able to buy. If you had specific county information and posted the areas in question, you could start a riot.

If it walks like a duck, quacks like a duck, etc., etc.................................

BTW, what the heck is a "cimarrona", the validation word?

I think that there is no question that it's redlining. My guess is that if challenged in court it would be upheld as so. The challenge is that we are in a declining market. This is the first time in history that a decline in housing prices has been nationwide. In past downturns it's been specific states or regions but never the entire country. The banks must do risk assessment, but I don't belive that redlining is the right way to go about it.

Hi Scott - yikes, I hope this isn't redlining, but it does seem to have the potential based on the way you wrote about it. It will be interesting to see how it plays out in those areas.

Ann

I'm definitely going to keep my eye on this one... it looks very close to crossing that gray area.

Redlining, to my mind, was discriminating against people by selectively limiting or refusing to finance borrowers in particular geographical areas because of a high percentage of minorities.

Limiting mortgage financing in areas with high foreclosures sounds more like a "risk assessment" to me.

Relining was a convenient subtrifuge for racial discrimination.

I don't see the connection.

Scott, I've heard investor down payments are going to increase to a minimum of 20% within the next 90 days (or less). Do you think this will happen... or will it be, like you say, for investment properties in certain locations?

I too do not feel it is redlining.

Scott, I need to know what kind of restrictions you read about in black and white in order to respond to our blog...Riverside County and San Bernardino are definately tanking fast and you have to ask yourself if you were a bank manager would you lend good money after bad an be held accountable for it? ktm

Scott - where does it start and where does it end? We can count on the sun rising and setting everyday, but we can't count on the loans or guidelines from one day to the next! The roller coaster ride has been fun, but I think it's time to...LET US OFF! :-) Enjoy the ride my friend, we're in in for the long haul!

SEP

2007

Interesting post. Thanks for sharing the information.

Scott the banks just have to look at what is happening in the market. On the current FHA appraisal form there is a check box for declining market value in the area and if the appraiser checks it the max LTV is 95%.

Scott,

Love the picture. Perfect for the post.

I think what you have described is certainly a grey area, and certainly could have a case for redlining. It is one thing to have a different guideline in a certain state based on state statues. It is entirely a different thing to have county by county guidelines set up solely by a banks previous experience. It's making someone late for the party pay for the other guests drinks. With that said I'm cool though on DU saying as it does from time to time that the house may have a value in excess of the local market and have someone ask for a second appraisal.

I had an experience about 6 months ago where an investor asked one of my loan officers to get an additional comp on a certain side of a specific road (which was smack dab in the middle of the area the appraiser defined). We mentioned they might want to check their mortgage dictionary and look up redlining. That investor surprise is out of business now.

Jon

I understand what you are saying. I don't think it's right by any means. From a business stand point, it does make sense to do that. I would be less willing to lend high ltv loans in an area where its well known that values are falling. Therefore a 90% ltv loan in that area today, could be 100% ltv in 1 year because its an area/county that has a ton of foreclosures and is predicted to have falling values. I don't think it's at all good for the overall housing issue though. It will make things doubly tough for these areas because that just means less deals closed in an area that has a lot of listings...which is also bad.

www.IEMortgageBlog.com

Great post and a really good point. Sounds like a class action in the making.

I don't know - from my perspective my entire state (Michigan) has had a red line drawn around it for quite some time. There are several lenders who won't do 100% financing in some counties, but will in others. It seems blatant to me, but the players who are doing it are so large (Citi, Wells, etc) that I suspect they've got some pretty highpowered legal minds on retainer who are signing off on the process.

SEP

2007

I have sent numerous emails to HUD, representatives, etc. because when these guidelines started coming out, "red lining" was the first thing that came to mind. Look at map overlays of where sub-prime concentrations are...the counties with the highest densities are now those subject to increased scrutiny. Similarly, these counties also have high concentrations of non-whites.

SEP

2007

Scott, Great Post. I am in South Florida and I know of a few lenders are actually adding 5% to the Ltv in some counties. If you are going for a 95% they add 5% to the LTV because they feel the properties are still falling in these counties. So the borrowers have to qualify at a 100%.

Very interesting. Sure doesnt sound like a smart move. Its only a matter of time before they single out the wrong person and this becomes a Huge problem.

Redlining? Definately debatable. The Housing Financial Discrimination Act/Fair Lending Notice reads as follows:

"It is illegal to discriminate in the provision of or in the availability of financial assistance because of the consideration of:

1. Trends, characterisitics, or conditions in the neighborhood or geographical area surrounding a housing accomodation, unless the financial institution can demonstrate in the particular case that such consideration is required to avoid an unsafe and unsound business practice...."

I guess the "burden of proof" is in the hands of the "financial institution." Would lending in high foreclosure areas with declining market values be "an unsafe and unsound business practice...?"

On the mortgage broker side....I know I would not want to explain "risk assessments" to my borrower who happens to live in the area of "distress."

To counter the redlining speculation, we are seeing LTV reduction in northern Virginia, specifically Fairfax county (one of the highest median income counties in the country) and Loudoun county (fastest or second fastest growing county in the country each of the last 5 years). Redlining does not seem to be a plausible explanation for this area. We are just a victim of ridiculous appreciation from 2003 thru 2005 for which we are now paying. To link redlining to our current problem you would have to also attribute it to the rise in property values during the previous few years as well.

I would find it hard to believe anyone could tie a 5% ltv reduction to any type of discrimination in this area. I think the only possible argument would be linking an above average foreclosure rate to both market decline and increased minority home-ownership. If I got stuck with trying to make the case FOR redlining, that would be my strategy.

Scott -

It is happening here in the DC / Baltimore area as well........

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