BluefoxToday blog : Mortgage lenders and new "redlining"

Mortgage lenders and new "redlining"

The nation's home loan companies have been battling deteriorating housing market conditions for some time now and that has caused severe losses for many of them. Property values are dropping in several areas and borrowers in these markets increasingly face the threat of foreclosure as their exotic ARMs reset higher and make payments unmanageable. Times are tough on both sides of the fence, to say the least.

In an effort to stem the bleeding, mortgage firms have instituted a bunch of new policies, one of which has drawn pretty heavy criticism from consumer advocacy groups and some in the lending industry itself. They call it new "redlining". It all started when Fannie Mae in December announced that from mid-January on it would require an extra 5% down payment from loans originated in declining areas. A declining, or high-risk, area could be an entire county, a metropolitan area or a zip code. Since last summer Fannie Mae has been labeling certain areas as declining and now it urged banks to use practically any available statistics to do their own risk assessments. Several national lenders have followed that advice and promptly stirred up the controversy.

What the critics are saying is that to paint a whole county, for instance, high-risk is simply overdoing it. Las Vegas is in Clark County, let's take it as an example, and admittedly overall real estate here is challenged, but there are multiple neighborhoods in the county where home values are stable or even climbing some. To punish everyone across the board just doesn't add up. Homeowners and the mortgage trade would be better served if a mortgage application was judged by diligent underwriting instead of where its location is. That's the way it should be.

Furthermore, it seems that these declining market tags lean harder on areas with large minority and moderate income buyers, some critics claim. Many of them were able to get a mortgage a few years back when stated and low- and no-down payment loan programs were all the rage. Now they can't sell because buyers eager to purchase are unable to qualify, their homes could go into foreclosure and then the area's property values sink further and that, at the end, hurts the banks, too, when they get undervalued repos in their books.

The alleged modern "redlining" could've been designed with more foresight.



Provided by: 

Esko Kiuru
Mortgage, real estate and apartment industry analyst - syndicated mortgage, housing and property management blog
My cell: 702-499-1006

Comment balloon 11 commentsEsko Kiuru • February 19 2008 09:35PM


Good post....never really thought about it that way, but for Fannie and Freddie, I'm sure that they're not thinking about anything other than cost economics.  I think that they have to otherwise, the next level of implosion will be really huge.
Posted by Larry Bettag, Vice-President of National Production (Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001) over 10 years ago


Looks like Fannie Mae just overreacted.

Posted by Esko Kiuru over 10 years ago

Esko, this move by Fannie & Freddie did not make any sense to me when I first saw it and it still doesn't make any sense.  House should be appraised the same across the board.  If values have gone down then it should be appraised at its reduced present value, and the same if it goes up.  But to automatically assume and penalize a Buyer by assuming that the property values are going to continue to go down is wrong as well as manufacturing a self full filling prophecy.

Posted by George Souto, Your Connecticut Mortgage Expert (George Souto NMLS #65149 FHA, CHFA, VA Mortgages) over 10 years ago


Sounds like Fannie and Freddie need to do some damage control of their image.

Posted by Fran Gatti, Managing Principal Broker - RE/MAX Integrity (RE/MAX Integrity) over 10 years ago


Fannie and Freddie made a hasty decision that they probably now regret.

Posted by Esko Kiuru over 10 years ago


Both agencies have had some issues lately, besides this.

Posted by Esko Kiuru over 10 years ago

I love the following comment:

"Many of them were able to get a mortgage a few years back when stated and low- and no-down payment loan programs were all the rage.

That was a very good way to put it!

Posted by D. Bass, Blog: Ask The Underwriter (Ask The Underwriter) over 10 years ago

D. Bass,

Those were the days.

Posted by Esko Kiuru over 10 years ago
Fannie and Freddie are caught between a rock and a hard place.  If they don't cover themselves from potential losses, they will continue to trade lower and lower.  However, they are in effect breaking the law by practicing defacto "redlining."  I don't know what the fix is.
Posted by Richard Sweum (1st Security Bank) over 10 years ago


They were probably pressured from many directions to act and they did without due consideration.

Posted by Esko Kiuru over 10 years ago
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Posted by piqhnj about 7 years ago