Mortgage Brokers Demand Higher Down Payments From Borrowers In Risky Zip Codes

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.

Zip Code ‘Redlining’: A Sweeping View of Risk [Washington Post]
(Photo: zenera)


Edit Your Comment

  1. DeltaPurser says:

    Hate to start this out on a sour note, but I think they may be doing a lot of people a favor by doing this…

    Too many people who shouldn’t have been given mortgages in the first place, are one of the reasons we’re in an economic slump right now.

  2. Frapp says:

    I just love how the article states that the general public isn’t supposed to see the site that has the zip code rankings on it. That’s just opening the door for lenders to make anyone pay the extra dough, even if the zip code isn’t tagged. How can a consumer defend oneself if the information in unavailable?

  3. Blaxabbath says:

    Doesn’t more down mean less in end? Seems like they are saving people money. Sure, I understand that it might be a little harder to save up for the down payment now — but these are for the 1,000 worst zips. What’s 10% on a 200K home is 20K. I don’t think that is asking too much of people.

    Consumer advocates should have stepped in when they saw low-income people getting approved for mortgages they couldn’t afford — not now when the free market is adjusting itself.

  4. TheUncleBob says:

    >”By definition, redlining is refusing to provide a loan to someone because they live in a high-risk area.”

    But they’re not refusing the loan, are they? They’re just charging more? Isn’t that typical of lending – charge more in a higher risk situation?

  5. madanthony says:


    It’s not even that they are charging more. When you think about it, they are charging less – higher downpayment means less amount financed, which means less amount of interest. Of course, it also protects the lender because there is less money to lose if they do foreclose, and it gives buyers an incentive not to walk away, because they lose some of their money if they do.

    I bought my house through a state first-time homebuyer program about 18 months ago. When I went for the mandatory counseling session, the person stressed that I had to put at least 1% down, and said it like it was a major stumbling block to a lot of people. She seemed impressed with my measly 10% downpayment.

  6. thirdbase says:

    Is there a way find out what my Zip Code is rated? I have to know so that I can budget. If they ask for 5% more that is a substantial amount of money.

  7. tedyc03 says:

    Didn’t it used to be that they required 20% down? Wouldn’t just requiring THAT solve the problem?

    $300,000 house
    x 20% down
    = $60,000 equity

    Seems reasonable to me…even though I wouldn’t be able to buy a house for a long time at my age and income I ought not be buying a house anyway.

  8. forgottenpassword says:

    “cats of the damned!”

  9. SoCalGNX says:

    We live in an “upscale” neighborhood. We share a zip code with part of a ghetto. For this reason, our car insurance is more than it should be. I can see lenders doing this. GMAC is one of the worst lenders out there so its no doubt they would do this.

  10. jpx72x says:

    Step 1: Make it difficult for already poor people to get home loans in certain neighborhoods.
    Step 2: Buildings sit vacant because nobody that can cough up a 5% down payment wants to live in that neighborhood.
    Step 3: Vacant buildings become crack houses.
    Step 4: The ghetto becomes a super-ghetto.

  11. swalve says:

    I wonder what the “correct” down payment is. Too much and they are redlining. One penny less, and they are causing foreclosures.

    @SoCalGNX: Probably not all that upscale if you live in the same zip code as early century forcibly segregated poor jewish people.

  12. WhaDa says:

    Duh. The bigger credit risk you are the more down payment you need. If lenders had been doing that we wouldn’t have the subprime meltdown now. I AM ALL FOR LARGER DOWN PAYMENTS! let’s get back to 15, 20, 30% down so people are invested into their property and not so willing to walk away.

  13. humphrmi says:

    @jpx72x: But as others have pointed out, the lenders are just requiring a higher down payment. Folks coughed up a 20% down payment for houses in these neighborhoods in the eighties, before less-than-20%-down loans made their appearance.

    Any vacant buildings today are the result of people getting loans who couldn’t afford them to begin with and being foreclosed. Tightening those requirements will eventually make that problem better, not worse.

  14. ConnerC says:

    I, as a few others here, fail to see this as a problem. I say more power to them in fact.

  15. chiieddy says:

    @DeltaPurser: This doesn’t help that. If mortgage companies pre-screen properly by insisting people supply proof of income and equity so they know how much people can afford and then supply appropriate loans for income levels there is absolutely no need for there to be any redlining of this nature. Where I live makes no difference to being able to afford my mortage rate.

    The people in trouble in this mess were offered loans without having to provide proof of income and took high risk non-fixed rate mortgages, often with no down payment required. The banks had no way of knowing what they could afford when granting the loans and, SURPRISE, they couldn’t afford payments once their adjustable rates adjusted to inflation or their no interest front loaded loans adjusted past their initial periods.

    So people can’t make their new payments and default on the loans, causing a subprime mortgage mess and costing the rest of us money when the market is glutted with foreclosed homes for sale, so we can’t sell our homes at a reasonable value when we want to, say, upgrade from a condo to a single family.

    This means we can’t get as much money for our home when we put it on the market and it means we’ll be able to afford less home in the future meaning someone else gets less money or we get less house or have to live in a less desirable neighborhood.

    It snowballs. People are getting less money for houses. There is a glut of houses on the market. New construction of non-commercial property is down. Indications begin to show we’re hitting a recession.

    I can’t see how anyone is surprised by this situation.

  16. chiieddy says:

    Note: I realize I glazed over and simplified the economics involved. I don’t have time to write a treatise on the subject :) even if I am on my 22nd minute of hold with my bank who is showing multiple duplicate payments in my bill payment window schduled to go out this week…

  17. ceejeemcbeegee is not here says:

    While I agree in theory, in practice it’s not a good idea in some markets:

    Avg LA home: $500,000 (and that’s in an OK not-quite-the-ghetto-but-close-enough neighborhood). 20$ down = $100,000.

    Who has that kind of downpayment? People who don’t want to live in the ‘hood. So then you have a glut of empty houses in these areas OR the market gets depressed. Homes that were valued at $500+ are now $300+. Those homeowners are stuck in a neighborhood surrounded by lower-income families or renters.

  18. Adam Hyland says:

    @DeltaPurser: No. This got started because mortgage lenders saw a bouyant housing market and engineered a way to push loans on people using the value of the asset to determine the size of the loan, not the buyers’ ability to repay (say, via salary). they convinced people that interest rates would remain low, housing prices would always go up, and as equity rose, they could refinance their homes on demand. this wasn’t a story that caught up only the “dumb, poor people” as you seem to thing. Everyone in the past 10 years had seen that happen. Housing prices rose from 1991 to 2007 without too much interruption. Home buyers sat on large amounts of equity vs. their debt because they were paying loans on the perceived value of their home when they bought it but the percieved value of their home at the time was much higher.

    Add in that the actual lengind instrument used was designed to maximize the value of the loan to the bank on paper (and likly force eventual bankruptcy) and you have a recipe for disaster. Regular home buyers–those with good or great credit–were pressured into these types of loans by banks and mortgage lenders. In more than one occasion, housing accessors felt STRONG pressure to appraise homes at the percieved market value, rather than the actual value (much, much lower). Home loan bundlers ignored or obscured the risks of these loans and resold them in packages with standard, less risky mortgages. Everyone had an irrational disregard for risk in these investments.

    That’s why this got started. Not that “too many people” got mortgages. Gee, I wonder who those people might have been? too many white professionals getting homes? too many older buyers getting their second homes? Hmm? Care to clue me in?

  19. humphrmi says:

    @ceejeemcbeegee: By your logic, the people who bought $500k houses couldn’t afford them to begin with, if they had been required to provide a higher down payment. Then prices depress to $300k, now some people can afford 20% down (= $60,000). So you’re worried about the existing residents, who couldn’t afford $100,000 down, now being forced to live in the same neighborhood with “low income” families who can afford $60,000 down?

  20. Sudonum says:

    What if in these areas they are requiring 50% down instead of 20%? Is that alright? Making the loan should be about 2 equations: Income to Debt, and Loan to Value. Zip codes should have nothing to do with it.

  21. ClayS says:


    My understanding of this is that the mortgage lenders are identifying markets where home prices are at a higher risk of decline. In those areas, they are asking for a higher down payment in order to avoid a situation where the home’s market value may drop to below the outstanding mortgage balance. The objective presumably is to avoid foreclosures and people walking away from the properties.

  22. RenardRouge says:

    There are SO many apartments going up in my area, and I assume it’s because people can’t come up with $20,000 for a down payment, but they CAN come up with the $1,000 – $2,000 for security deposit, etc.

  23. Adam Hyland says:

    @ClayS: My understanding is that is still basically redlining.

  24. GearheadGeek says:

    @ceejeemcbeegee: That’s a sign that the homes were never really WORTH $500k (cue people shouting that the value is whatever someone will pay.) Granted, I live in the middle (Texas) so it’s a bit easier for me to say that house prices have been just ridiculous in the LA megalopolis, but house prices have been just ridiculous in LA of late.

    SoCal is nice and all that, but it ain’t THAT nice. Without compliant (perhaps complicit?) appraisers and venal mortgage brokers, the prices wouldn’t have become THAT insane.

  25. TheUncleBob says:

    @Sudonum: Let me know when you start up a loan business. I want to borrow from you. ;)

  26. Kounji says:

    I for one think its a good idea that corrections are finally coming. People not putting any money into an investment like a home is utterly stupid. Its akin to taking out a loan to put money in the stock market, you’d have to seriously be lucky, and smart at the same time in order to make a profit. In this case its almost like taking out a 9% interest loan for a 5% interest CD, duh of course you’re going owe more money then you put in.

  27. humphrmi says:


    What if in these areas they are requiring 50% down instead of 20%?

    But they’re not. The point is that they’re not asking them to fund any more of their own loan than anyone else could potentially be asked to fund. If it were 50% in these areas, I’d be with you. But it’s not.

  28. humphrmi says:

    Oh and by the way, we’re not even talking about 20% down for crying out loud, we’re talking about being required to put five percent down in these zip codes.

  29. Trai_Dep says:

    Nice X-Cats picture. TOTALLY sympathetic to their owner who wisely eschewed the “Let’s try a shot with them wearing black Spandex outfits” photo series. (To be followed by the “Arrgh, Shriek, Yow!, my hands are now bloody stumps” one.)

    But which one is Sit-On-Sil-Lass and which is Hairball Lad?


    It actually makes sense, unlike redlining. If there’s a 20% foreclosure rate for a neighborhood, it’s signaling fluid prices and unlikelihood of quick resells, probably of further drops. Thus tighter requirements, which end up making the buyer invest more, speculate less.

    Isn’t redlining evil since it takes non-economic criteria and penalizing buyers?

    This seems different in that regard, though I’m open to being educated…

  30. Sudonum says:

    You want a Real Estate loan? Give me a call.

  31. Sudonum says:

    As long as the bank policy concerning Loan to Value is consistent across all zip codes then fine. If however they are allowing 100% loans in one area and only 70% loans in another then they have a problem.

  32. goller321 says:

    I smell lawsuit. This is blatant racial profiling. American Family did the same thing in Wisconsin, and got sued for it.
    And let’s be honest, there are PLENTY of stupid white folk out there taking out excessive mortgages on their upscale homes. Their ability to do mortgages should be revoked.

  33. Sudonum says:

    And of course it’s also all predicated on the appraisal. And as we’ve seen before, trying to get accurate appraisals in a volatile market is nearly impossible.

  34. goller321 says:

    @humphrmi: Read the feakin article. It’s and ADDITIONAL 5%, as in on top of the amount someone else would have to put down… not just 5% total…

  35. Tracy Ham and Eggs as played by Walter Mondale says:

    Lenders refused to lend in certain areas

    NAACP and jurisdictions sued for Redlining.

    Lenders moved into those areas, but because of higher default rates and worse credit charged higher interest and fees

    NAACP and jurisdictions sued for reverse redlining

    Lenders require higher downpayments in declining value areas so they can offer the same rates everywhere

    I think we can predict the next step huh?

  36. Dustbunny says:

    In other news, cats demand higher tuna payments in advance from humans in risky zip codes.

  37. consumerd says:

    Damn I know I don’t live in a rich part of town but don’t make pennies on the dollar either. This makes me wonder if I am under fire because of other people’s actions.

    If anyone can get the zip codes in question or under fire, post a link here.

  38. humphrmi says:

    @Sudonum: The LTV requirement for all conventional conforming loans is consistently 80%. Then, some special programs kick in, like FHA and PMI. And during the real estate and subprime lending bubble, banks got into the business of offering these special deals too. Now it seems like they’re getting out, for some zip codes, due to softening values and lack of comps.

    For the last couple of months we’ve all been wailing and gnashing our teeth about how we got into this mess. Now the banks are making changes to ensure that it doesn’t happen again, and everyone’s wailing and gnashing their teeth about that. Here’s a news flash folks, the economy is unfair. If you want to buy a house in a place where prices are falling, you need to pony up more.

    @goller321: I did, and that’s not my point. The point is that we’re not talking about everyone in these zip codes being required to put down 20%. Maybe some will only have to put down 5, or 10, or 15.

  39. foxjam says:

    I work for one of the largest mortgage companies in the US so I feel I must share. Here is what we do.

    Your house is your collateral for your mortgage. Lenders need to verify that you have the collateral for the loan. In the department that I work in we won’t give you a $100,000 loan if your house is not worth $100,000. I’m pretty sure that is standard practice across the industry. We require appraisals on all of our loans. If an appraisal comes back stating that your home is in a “declining market” or a “distressed market” that means a $100,000 loan may be backed by a $90,000 house a year from now. In order to protect ourselves we don’t offer maximum financing on a home in a volatile market.

    A lot of this mortgage mess is because people have no equity or negative equity in their homes. I see it everyday. People want to borrow as much as they can and then can’t understand why they can’t refinance when there home is worth less than what they owe.

  40. JustAGuy2 says:


    Yup, and this is about LTV. If V is at risk, you need a smaller L to keep LTV in check.

  41. LilKoko says:

    @Hyland: Thank you. I think you spelled it out very well.

    May I recommend that everyone read [] There is a plethora of information related to this and it’s written by people who know what they’re talking about. (The comments are pretty good, too — so don’t troll and mess it up!)

    I only recently discovered it and I’m hooked. Once you read the blog, you’ll get an idea why this situation is so messed up and why just about everyone will be affected by it. You’ll also understand why the information you’re getting from the mainstream media is to real information as saccharin is to organic honey.

  42. LilKoko says:

    @LilKoko: Referring to Hylands 11:26 AM comment.


    I live in Los Angeles, in the West Adams area (Adams & Crenshaw). I own a duplex one block south of Adams in an “OK” neighborhood. If I walk one block north of Adams, there are renovated mansions with yuppies that are part of the gentrification wave. My question is: do we have the same zip code and if so, have their home values declined as well? Hmmm…CeeJeeMcBeeGee must know what I speak of.

  44. Me - now with more humidity says:

    THEREWILLBE: Absolutely. We own in Baldwin Vista. Baldwin Hills — the richest black neighborhood in America is in our ZIP, as is part of low-rent Crenshaw, not to mention the Jungle apartment zone. Swalve is an idiot.

  45. swalve says:

    @Me: Not an idiot. Just pointing out that the word ghetto is offensive.

    @Tracy Ham and Eggs as played by Walter Mondale: Correlation is not causation, or however that goes. It is wrong and illegal to prejudge people based on things like race and location. You can qualify them based on certain “blind” criteria like income and credit history. Zip codes and skin color are not predictors of behavior.

  46. Crazytree says:

    sounds like a per se violation of the California Rumford Act.

  47. XTC46 says:

    @tedyc03: it doesnt work like that any more. In my area, 300k gets you a 2 bedroom townhouse in a state subsidized housing area. A 2-3 bedroom single family home goes for 500k. Hell we have 1 bedroom apartments going for 500k around here and million dollar apartments aren’t all that rare. So for me to have to come up with 20% of a 500k house (thats 100k)as a down payment is insane and no possible. But a 5 percent down (25k) is doable, and I can pull of a 30 year fixed without too much of an issue it would be 1300 a month + interest) and I pay almost that in rent, so now I just need to come up with a down payment.

  48. humphrmi says:

    @xtc46: So what’s wrong with a 2 bedroom townhouse in a state subsidized housing area?

    You know what people used to do before >80%LTV days? Rent. Trailer. Parents. Save. Afford. Keep home.

    Ah but we’re all entitled these days, right?

  49. humphrmi says:

    @swalve: Skin color is not a predictor of behavior. Zip codes are a predictor of Value, which is the V in LTV.

  50. LoanWolf says:

    Maybe it’s a matter of regional semantics, but I’d rather have seen “Mortgage Lenders” emblazoned in this article’s headline, rather than “Mortgage Brokers”.

    As a licensed Florida mortgage broker, I’m not in a position to demand anything from anyone.

  51. nrwfos says:

    I don’t know that this observation has any thing to do with this topic…BUT I’ve started noticing on the “Flip That House” has a disclaimer about people doing this with “real” money and not to do it without Planning or research (for a better term) is not advised, i.e., “Don’t do this at home, kids”. Also I noted on a show an new homeowners since the meltdown (not mentioned that way on the show) that pre-approved mortgages were being reevaluated and most of these in new builder subdivisions were being given lower prices if they went with the builder’s loan company. This in itself probably isn’t new…but it’s the first I’m noticing being mentioned on these TV shows.

  52. ceejeemcbeegee is not here says:

    @humphrmi: Yeah, you say “live with parents” is a solution, but I bet you’d compalin about 30-somethings “mooching” off mom and dad in the same breath.

    @therewillbefood: That’s exactly the area I was thinking of….
    @Me: I beg to differ… are you forgetting my beloved Ladera Heights in that “richest black neighborhood” category? ;-)

  53. brokeincollege says:

    It’s all the baby boomers’ fault. They punched that big hole in the ozone layer, they drove up property values with their junk bonds and whatever else, and they now that they’re rich they’re depressing wages so people in the next generation (my generation-the generation of people graduating from college about now) can’t afford a home till they’re 40. Stagflation all over again. Real wages down, inflation up.

    They created this whole mess, so its their time to clean it up. And then they chastise us for being “financially irresponsible”. Do you have any idea how much the average college grad makes? $35k. After taxes, that’s $28k. Which comes down to $2400 a month. Not to mention $40k of crushing student loan debt. They made $35k in the 80’s. If real wages had remotely kept up with inflation, or even tried, maybe people can actually AFFORD to put down 20% for a house and be able to buy one before they retire, in a neighborhood where they’re not likely to get shot.

    Honestly, I don’t feel bad for people in their 50’s whose home values are going down because people can’t afford to buy them anymore. Oh, and they expect us to pay for THEIR retirement, too.

  54. brokeincollege says:

    Something’s seriously fucked up when college grads have to join the military to pay off their student loans. Or drop out of college and join the military because they can’t afford it anymore.

  55. Sudonum says:

    I build and sell houses for a living I’m well aware of the “conventional” or “conforming” requirements.

    My point is that lenders can vary the LTV ration based on FICO score as well as Income to Debt. They can’t do it based on location. As I said in a later post. It can all comes down to the appraisal. Since lenders generally select their own appraisers they can use ones that might tend to “devalue” the property as they so choose.

    See above paragraph

  56. Sudonum says:

    @Sudonum: And as other posters have pointed out, they can charge a higher interest rate based on FICO, LTV, and Income to Debt, not based on the zip code.

  57. swalve says:

    @brokeincollege: Please stop. If you compare apples to apples (same profession salaries) they are up plenty. And student loans aren’t “crushing”, they are the best investment you ever made. Low interest rates, liberal repayment terms and the priceless education. The boomers are guilty of a lot of things, but none of us will ever have to come up with a 20% downpayment for a 17% mortgage while there is 10%+ inflation per year, like the boomers did in the early 80s.

    And these numbers say you’re wrong:

  58. brokeincollege says:

    Same professions? The IT industry in America doesn’t exist anymore, remember? The whole industry went to Bangalore.

  59. brokeincollege says:

    What about the skyrocketing cost of higher education? Have wages kept up with them? In the 80’s, college costed $7k for the more expensive private schools. Now they cost $55k all in. You’re telling me that real wages went up 800% in the past two decades? Please.

  60. Erwos says:

    @brokeincollege: Maybe the value of a college degree went up by 800% in the past two decades?

  61. SoCalGNX says:

    You evidenlty do not understand the current useage of the word “ghetto” and have reverted to the useage popular in earlier centuries. Get with the times.

  62. stepone says:

    If you read the article, “upscale” or “ghetto” doesn’t really figure into the distribution of high/low risk designations. An expensive house can decline in value just as easily as an inexpensive one, and those loans are deemed high risk, according to the article.

    It’s inaccurate to assume, without additional information (size of loan being a key bit), that a high-risk borrower is the same as a low-income borrower.