Redlining is a term that describes the unethical–if not illegal–practice where lenders “red line” a neighborhood or community, making it very difficult for buyers to purchase in these afflicted areas.
I have recently heard from a couple of direct lenders in San Diego, Countrywide Home Loans and Bank of America, that most if not all of San Diego County real estate is in the “red zone.”
Qualifying for current “red zone” status simply means that the subject property is located in a “declining market” area. The impact of this colorization is significant to both the San Diego real estate market as a whole–and to first time home buyers in particular.
Furthermore, I suspect it is a practice affecting much of the country.
How this version of redlining works creates a no-win situation for buyers putting down less than 5 percent.
Even if a buyer has negotiated a bargain purchase price, say 10 percent under market value, the appraiser will automatically deduct another 5 percent from the contract price to determine a value. In other words, a borrower cannot get away with putting less than 5 percent down.
I spoke with Brian Brady a couple of weeks ago about this matter. I had been told by a representative from a large direct lender that San Marcos, CA was in a “red zone,” and would be subject to different lending standards. Brian bristled at the thought of redlining, declaring it an illegal practice unless an entire region were painted red.
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