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.