Prospective home buyers may need to pony up more cash up front to secure a mortgage if they are looking to buy in one of hundreds of zip codes that lenders now consider “soft markets.” Countrywide and GMAC recently ranked over 1,000 zip codes on a risk scale of 1-5. Lenders to moderate risk zip codes, ranked 1-3, may require borrowers to pay an additional 5% down payment. Unlucky buyers in high risk zip codes, ranked 4 or 5, are now automatically required to put down the extra 5%.
Ted Grose, president of Los Angeles-based 1st Mortgage Advisors, 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,” Berenbaum said, “runs afoul” of federal fair lending and Civil Rights statutes. “It is redlining.”
Paul Skeens, head broker for Carteret Mortgage in Waldorf, 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,” Skeens said. “People can’t buy there because they need more cash upfront, the houses don’t sell and prices go down.”
By definition, redlining is refusing to provide a loan to someone because they live in a high-risk area. We don’t know how this isn’t a form of redlining, but that’s because our closet isn’t full of high-priced lawyers willing to help us circumvent the law for $600 an hour.
Prospective homeowners should check with their realtor to see if their desired zip code comes with a financial penalty that could affect their purchasing plans.