Kenneth R. Harney, Washington Post Writers Group
February 3, 2008
On Jan. 25, Countrywide Bank sent mortgage brokers a list that categorized hundreds of counties as "soft markets" with rankings from one to five, in ascending order of perceived risk. In areas rated 4 and 5 -- roughly 100 counties in metro areas nationwide -- Countrywide said it will now require 5 percent larger down payments from most applicants. If a loan program allowed a 5 percent down payment, applicants will be required to come up with 10 percent to qualify.
An additional 970-plus counties are rated more moderate risks, in categories 1 to 3, with 5 percent down-payment increases if an appraisal report indicates an "oversupply" of houses for sale or a marketing time of more than six months.
Other national lenders have distributed their own proprietary "declining markets" lists. Minneapolis-based GMAC-ResCap even has a Web site allowing loan officers to type in a ZIP Code and learn whether the company ranks the area a D, C or lower risk. Though the public is not supposed to see the site, one mortgage company executive provided me with an access link.
In late January, a ZIP Code for McLean, Va., -- a high-income, high-cost residential community and home of mortgage investment giant Freddie Mac -- was rated a high-risk D. The upscale residential neighborhood in northwest Washington, D.C., where Fannie Mae, another mortgage investor, has its headquarters was rated at an elevated risk of C.
Restrictions imposed by Fannie Mae late last year have prompted lenders to compile area by area risk ratings and impose down-payment penalties. In a notice to lenders Dec. 5, Fannie Mae said all loans delivered after Jan. 15 on properties in "declining" areas would be subject to 5 percent higher down-payment requirements. The company's own electronic underwriting system had begun flagging selected markets as high-risk last summer. Fannie Mae also strongly encouraged lenders to use "supplemental" data sources to develop risk-ratings by market area.
Critics charge that imposing higher down-payment standards or other penalties for all applicants in a county, metropolitan area or ZIP Code is unfair to homeowners and buyers in sub-markets or neighborhoods that may not be declining in value or not by enough to justify punitive underwriting requirements.
Counties in the Chicago area are ranked by Countrywide's Soft Markets Index as Category 2s -- they are soft markets, with the potential down-payment hits, but they are nowhere near as high risk as many in California, Florida, Arizona, Nevada and Washington, D.C.
Ted Grose, president of Los Angeles-based 1st Mortgage Advisors Inc., said labeling counties as "declining" is "ridiculous -- it totally fails to distinguish between areas where prices are rising or relatively stable, and other neighborhoods or communities where they are not."
David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a consumer advocacy group active in litigation against subprime mortgage companies, said that "sound underwriting has nothing to do with geography. It is based on the income and qualifications of the applicant and the valuation of the property by a professional appraiser.
"Anything else," said Berenbaum, "is redlining."
Paul Skeens, head broker for Carteret Mortgage Corp. in Waldorf, Md., said he had observed that lenders' county and ZIP Code designations "have their heaviest impacts on areas with high proportions of minority groups and people with moderate incomes who bought houses" with low- and no-down-payment in the first half of the decade.
Labeling these areas as "declining" and then imposing higher down-payment requirements "becomes a self-fulfilling prophecy," said Skeens. In an interview, Brian Robinett, chief credit and operations officer for wholesale lending at Countrywide, vigorously rejected that. Countrywide's risk-ranking list distributed Jan. 25, he said, is based on data on prices, sales and other indicators spanning 12 to 18 months.
"It would be hard to make the case [of redlining] against" the company's ratings. After all, according to Robinett, a wide variety of property types, income levels and ethnic groups are "equally affected" by every risk ranking. If a major lender has tagged your ZIP Code, county or metropolitan area with a scarlet letter -- and they exist in virtually every state, including many in places generally assumed to have relatively healthy market conditions -- you'll need more cash upfront, even if the risk designation does not apply to the house you hope to buy or finance.
Contact Kenneth Harney by e-mail at realestate@tribune .com or send letters to: Kenneth R. Harney, Chicago Tribune, Real Estate, 435 N. Michigan Ave., Chicago IL 60611. Sorry, he cannot make personal replies. Answers will be supplied only through the newspaper.
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