Declining markets hurting minorities

This "would allow homes to be evaluated as individual risks," Sandos said, rather than painted wholesale with scarlet letters as "declining" when in fact they are not. Minorities and moderate-income households may be disproportionately affected by such broad-brush designations, he added, and they are often less able to come up with the higher downpayments demanded. That, in turn, makes selling and buying tougher in their neighborhoods, lowers demand and prices, and constitutes what Sandos calls "a circular, self-fulfilling prophecy," with the designation actually fueling further decline.

Sandos' group co-authored the critique along with the National Association of Real Estate Brokers, which represents black realty professionals, and the Asian Real Estate Association of America. The biggest real estate lobby, the 1.3 million-member National Association of Realtors, has also weighed in on the issue. In April 11 letters to the chief executives of Fannie Mae and Freddie Mac, Richard F. Gaylord, the group's president, asked the two companies to "discontinue the policy of stigmatizing entire ZIP codes," or metropolitan areas, as declining markets, since they "typically include widely differing" local neighborhood conditions.

Gaylord said "the reports we hear are that [lenders] are extremely reluctant to do so" - for fear that they'll be forced to buy back loans if borrowers default.

Steven Brooks, executive vice president of Flagstar Bank, a major lender based in Troy, Mich., confirmed that as a general rule, if Fannie Mae's automated underwriting system identifies an area as declining, "we typically will follow that" finding in underwriting and pricing a loan application.

However, he said, "on a case by case basis" - when an appraisal comes in with a strong, well-documented valuation - "we do make exceptions."

Asked for comment on the declining markets issue, Fannie Mae spokesman Brian Faith said the company is "considering making changes and refinements" in its policies, but has no specific details.

Bottom line: For the time being, if you own a property or plan to buy in any of dozens of metropolitan areas and thousands of ZIP codes dubbed declining, expect to pay extra when you apply for a loan: At least 5 percent extra on downpayments, a higher interest rate, and maybe a more limited menu of loan options.

kenharney@earthlink.net.