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Letter to the editor

Lenders demand larger down payments in 'risky' counties

By Kenneth R. Harney, Special to the Times
Published February 2, 2008

WASHINGTON - Critics call it the new redlining: Many of the country's largest mortgage lenders are imposing loan restrictions in entire counties or ZIP codes that they rank as risky or "declining."

On Jan. 25, Countrywide Bank sent mortgage brokers a list that categorized hundreds of counties as "soft markets" with rankings from 1 to 5, in ascending order of perceived risk. In areas rated in categories 4 and 5 - roughly 100 counties in metropolitan areas nationwide - Countrywide said it will now require 5 percent larger down payments from most applicants. If a loan program previously allowed a minimum 5 percent down payment, now applicants will be required to come up with double that amount to qualify: 10 percent.

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 there is 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 instantaneously learn whether the company ranks the area a D, C or lower risk. Though the general 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 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 on Dec. 5, Fannie Mae said all loans delivered after Jan. 15 on properties located within "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 come up with their own risk ratings by market area.

Critics charge that imposing higher down-payment standards or other penalties for applicants in an entire county, metropolitan area or ZIP code is unfair to homeowners and buyers whose properties are located in submarkets or neighborhoods within those jurisdictions that may not be declining in value, or not by enough to justify punitive underwriting requirements.

Ted Grose, president of 1st Mortgage Advisors Inc. in Los Angeles, said labeling entire 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, "runs afoul" of federal fair lending and civil rights statutes. "It 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 programs during 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. "People can't buy there because they need more cash upfront, the houses don't sell, and prices go down."

In an interview, Brian Robinett, chief credit and operations officer for wholesale lending at Countrywide, vigorously rejected the criticism. Countrywide's risk-ranking list distributed Jan. 25, he said, is based on comprehensive data on prices, sales and other indicators spanning 12 to 18 months.

The takeaway for the time being on this issue: If a major lender has tagged your ZIP code, county or entire 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're going to need more cash upfront. That will be the case even if the area risk designation has no real applicability to the house you hope to buy or finance.

E-mail Kenneth R. Harney at kenharney@earthlink.net.

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How we rank

Here's how the Tampa Bay area counties rank in the Jan. 25 Countrywide Soft Markets County Index:

Hernando, Hillsborough, Pasco and Pinellas are all rated Category 4. That indicates risky, but not maximum risky like Manatee, Sarasota, Broward, Miami-Dade and Collier counties, which are all Category 5.

Citrus County does not appear on the Countrywide list, but the ZIP code for Inverness, 34452, is rated a "D" - high risk - by GMAC-ResCap.

[Last modified February 1, 2008, 13:24:58]