By Dustin R Burke, Adonai Financial 

If you haven’t already heard the term “soft market” – you will.  As most of us know certain areas of the real estate market have been in decline for around a year now.  The correction has appeared to have been mild, until recently where more and more markets appear to have accelerated into a free fall.

The banks and lenders, in an attempt to mitigate loss, have implemented round after round of tightened guidelines.  Each time banks tighten the money supply it becomes harder to purchase and refinance homes thereby further starving the real estate market of much needed liquidity.

The new buzz word is “soft markets”.  Soft markets are those certain counties, cities, zip codes, or even neighborhoods that are declining in value.  Recently, Countrywide, the nation’s largest mortgage servicer, implemented as numeric rating certain markets to determine the severity of the areas that have been tagged a soft market.  An area that receives a numeric rating of 1 – 3 is defined as a moderate risk and an area receiving a rating of 4 – 5 is defined as high or severe risk.

HSBC followed Countrywide’s lead and also implemented a less complicated, two tier system defining areas as “soft” or “stressed”.    These systems have been put in place to try and mitigate losses.

When are has been defined in one of these ways the banks have decided to lower the maximum loan-to-value ration (the maximum percentage a bank will lend on a property) by 5 percent, and in some cases up to 10 percent.  So, in a normal market a borrower can by this house with 5% down.  In a soft market he/she will have to put 10% down or even 15% down is the market is defined as “stressed”

Here is the problem with this:  Areas that are first to be affected by the stresses of the real estate decline are those with people of lesser means and then onto the middle class.  When you take a populous who is already under the strain of a depressed market mixed with a looming recession this action only compounds the problem by limiting the borrowers who will qualify to purchase in that specific area.

So, how is this redlining?  I’ll tell you.  Redlining is loosely defined as denying or increasing the costs of services of banking, mortgage, etc. to residents in certain areas.  When banks offer loans to similar borrowers and require one borrower to place 5 percent down and the second borrower to place 10 or 15 percent down simply because of the area, with no other distinguishing fact between them it become redlining and only further hurts the market.

What is your opinion?  Send me an email to dustin.burke@adonaifinancial.com.