Real Estate Blog - The Scarlett Letters of " Declining Market", Redlining ??

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The Scarlett Letters of " Declining Market", Redlining ??

We have all heard the conversations surrounding " Declining Market " and we have heard it here in the San Diego Housing Market as well. But until now many have not realized that the term declining market is having far more reaching implications as a new threat to the housing market recovery. The term "declining market" is now manifesting itself to have a most deleterious effect across the whole country.

What is taking place is that lenders and mortgage investment firms are using the status " declining market" to charge higher interest rates, higher loan fees and higher requirements for down payments in these markets. In some cases refusing loans for marginal buyers all together. Even the appraisers are factoring in an adjustment to value based solely on the designation of "declining market".

These declining markets are not just a few around the US as there are between 800 and 1200 whole zip codes tagged with this designation.

Areas already hit with above average foreclosures, short sale requests or slower than normal market recoveries are now facing yet another new challenge. The "declining market risk factor" affecting the way the loan and mortgage industry are employing the current Fannie Mae and Freddie Mac's automated underwriting system to respond to loans from specific areas are beginning have adverse affects on the housing market. This needs to be called out and corrected before permanent damage is done and whole areas become blighted.

Minority groups and areas with strong concentrations of minorities across the US seem to be the hardest hit and it then becomes the potential for the stigmatizing of whole neighborhoods. It is being strongly suggested that they discontinue the practice of designating whole zip codes because the zip codes are proven to be made up of differing local neighborhood characteristics.

There is another word that may discribe this that has not seemed to cross the consciousness of the underwriters and the loan industry. The word I am referring to is "Redlining".

There is going to be a lot more to this story as government oversight surely will begin to look at the evidence of the accumulating damage . In response to these accusations by many that monitor the market areas, it is being pointed out the Fannie Mae and Freddie Mac policies permit lenders to make exceptions of the declining market status. Lenders have the right to make the exceptions but at whose peril? Will they then be buying back these mortgages if the borrowers default? It seems to me that it is too easy to follow the declining market guidelines and let someone else deal with the problem. Sooner or later, I can assure you, someone will. But will it be too late?

Posted by San Diego Real Estate Voice authored by William Johnson on 04/27/2008 06:05 PM

Comments (10)

san diego hosuing market, zip codes designated as decling market areas, risk factor, fanniemae and freddie mac, underwriting guidlines

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10 Comments on The Scarlett Letters of " Declining Market", Redlining ??

APR

2008

Hello, William and fellow Tomato blogger: I think we need to be very careful using the word redlining and pulling out the card that somehow infers that lenders are using declining values to discriminate against borrowers.

Banks are qualifiying properties and assigning a risk factor on the future chances of the property losing value. How is this different from them assigning a risk factor by using a credit score? That is measuring the chances of the borrower's future ablility to pay.

If it is true that lower income people have lower credit scores does it then follow that the bank is discriminating against lower income people?

Or does it just mean that they are covering their butt against future losses. I hate it as much as anyone and it has cost me many loans. I agree it is not fairly applied....but do not agree that it is about anything other than this "we have lost millions. What can we do to stop this bleeding?

Hello William...I posted about this a while back when I saw the list of States and counties that are being Rated as to lendability and risk...not individual properties...whole counties. I'm afraid I can't agree with Janet(sorry janet) but when a certain county is being earmarked it automatically lowers the value in the whole area...I believe that is redlining.

I actually got a phone call from a lawyer group that represents consumers after one of them read what I wrote and she said they had been hearing it from others!

I LOVE your graphic...where did you get it?

(Be sure to come over to my house tonight...I have a fun toy for you to play with)

Hi Joan, When whole zip codes are used to define a market as declining, then yes, in my view it could be considered redlining. It will be for others to make that determination but when it quakes like a duck, walks like a duck , there is little point in trying to describe it as dog. You watch, as this continues, others will be investigating the resulting effects and I think many will be found wanting. Potatoes, corn and broccoli are all vegetables but they are not the same vegetable. All are measured quite differently on the nutrition scale. People, communities, whole cities can't be lumped together as one type of desirability, credit worthiness or of a particular risk factor based on a zip code, nor should they be. To do so adversely may rightfully be considered redlining.

Hi Joan, I sent a separate e-mail to you. I am glad you agree with my particular opinion. People are just beginning to recognize the effect this may have on whole segments of the housing industry. It will evidence itself more and more as the foreclosures and short sales continue. Who can not really know where all this is heading but it doesn't sound like a good place or bode to well for the immediate future of the housing markets.

APR

2008

When I do a BPO for a property, I usually pull the neighborhood's average sales price from 6 months ago and then current average sales price. Those sales prices have declined 8-15% in our areas. The stats say what they say. If lenders can back up the claim that particular neighborhoods and sometimes zip codes are truly declining, how is that redlining?

The party is over. There's no more cheap money and we are returning to normal. Suddenly, it's not fair?

William, we're certainly facing this problem in Florida.

Karen - you can make statistics say different things by how you're choosing them. While it may be factual statistics that the "average" home in a zip code or in a city is declining, yet a particular neighborhood is not declining, is the larger average fair or represenative for that area?

By reducing appraisals and increasing loan costs and/or denying loan in certain areas, the lenders are contributing to higher inventory and yet lower prices.

Hi Sharon, Good comments and very much appreciate that you have come to my defense. As a caveat to taking a stand against the use of zip codes as defining the declining markets, I have this to further add. Be it known to all that this post is not stating that identifying zip codes as declining markets for loan purposes as proof of redlining. I simply go back to the idea however that if it looks like a duck, quacks like a duck, asking me to imagine I am seeing a parrot imitate a duck is fine. But unless I see that parrot swim like a duck I'll bloody well know this is a duck. Another caveat: I guess if you can train a seal to play ball, dance and add and subtract, it might be possible to teach a parrot to swim and pretend to be a duck.

Hi Karen, Thanks for dropping by and sharing your insight. The empirical data that you state is housing information. Loans are granted to individuals based on their ( at least it used to be) credit worthiness and were never intended to make a statement about the quality or desirability of their neighborhood, it's subjective values or the suitability of that neighborhood, city or zip code. The property itself was qualified as being suitable for lending based not on its location unless it be in a hazard area and then only if properly protected with insurance. By designating areas as a declining market used for determining suitability of lending, a different message is sent. It is stating that the neighborhood now has a history of falling values and does not warrant the greater risk of lending in that area unless lending sources are remunerated with higher costs and higher interest. The conclusion drawn by the buyer may lead them away from that neighborhood. How would you define Redlining if that is the result. As a licensee, if you make statements orally or in writing that undermine an area, a specific culture of person(s) residing in or around a neighborhood or cause defining conclusions as to an areas desirability based on your opinion, with those conclusions being drawn from your remarks, attitude etc, Is that redlining? I am not sure I see a difference so I leave that final question for others to answer.

APR

2008

Hi William--Love the title...You must have read that Hester Prynne story somewhere in your past. As for the comparison of redlining to declining markets I believe there is a correlation as well. There are neighborhoods in the state of MN with that designation, though I hear it will be dropped in many areas in May. Some of the hardest hit areas are neighborhoods that will have a much more difficult time coming back. Many areas had homes that were affordable to the first time buyer with no money down and elderly facing health care costs where they took that 2nd mortgage and now cannot pay. I wonder how difficult it will be to get homes to appraise in these areas for future loans as the foreclosure rate will no doubt cause a further decline. Good thoughtful post.

Hi Teri, I shutter to think sometimes how fast things can change and then even to wonder why. I suppose it might have occurred to me that the Scarlett letters , spelling r-i-s-k and the correlation through my subconsciousness of the story behind that it seems to fit. Will we as REALTORS recognize when someone has that piece of cloth pinned on them, to know that they may have to suffer further indignity when it is revealed they are in wrong zip code and they will need more than just a qualified Buyer to sell their home.

Will we remember at what closings do take place to pin that cloth on the new Buyer, forever destained as living in the wrong zip. Will there be a special section in the phone book designated to declining market zip codes of the persons non-grata or property addresses non-grata within that zip?

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