Could widespread designations of entire ZIP codes, metropolitan areas - even entire states - as "declining markets," hinder a real estate recovery and hurt minority groups and moderate-income buyers disproportionately? Growing ranks of critics say the answer is yes.
Since late 2007, most lenders, insurers and mortgage investment firms have compiled lists of local markets that they consider to be posing higher risks because housing values are dropping. Within those areas, borrowers are charged higher rates, loan fees and downpayments - costs that can rise significantly when applicants have credit scores below designated minimum levels.
In some cases, the extra fees can add more than two percentage points to the interest rate, and require much more cash up front from applicants. At their extreme, declining market designations remove entire categories of real estate from financing eligibility. Some private mortgage insurers, for instance, won't touch second homes or rental home investments anywhere inside large swaths of Florida or California.
Industry estimates on affected ZIP codes range from 8,000 to more than 12,000 across the country.
But now a broad-scale reaction against declining real estate market policies is taking shape. Consumer and industry groups are demanding that lenders and investors abandon or modify their approaches, and are urging mortgage insurers to loosen up on theirs.
An alliance of three "multicultural" real estate trade groups representing Hispanics, blacks and Asians recently asked the mortgage industry to get rid of its current patchwork of proprietary - and often contradictory - lists and replace them with a single, more flexible and transparent policy for assessing the "true risk" on real estate in local markets.
Timothy Sandos, president and CEO of the National Association of Hispanic Real Estate Professionals, said current policies have the effect of cutting out or penalizing huge geographic areas that contain many smaller sub-markets where values are relatively stable or do not pose exceptional risks. Sandos wants greater emphasis to be placed on what appraisers find and document, rather than computer-generated statistical models.
