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Fair assessment of risk or Redlining?

Last week on my blog I noted what would happen if my local real estate market were to become a “declining market.”

This week brings a perspective from the Washington Post and the Consumerist that “declining markets” equate “redlining.”

Redlining:

Redlining refers to the illegal practice of refusing to make residential loans or imposing more onerous terms on any loans made because of the predominant race, national origin, etc., of the residents of the neighborhood in which the property is located.  Redlining violates both the FH Act and the ECOA.

Does the determination that a particular neighborhood or area has declining values really equate racial redlining, or are the lenders using good judgement (something they seemed to have been lacking over the past few years)?

Race is a tricky and always delicate topic, but I just don’t see the parallel between declining values and race.

One of the folks at FortiusOne sent me a link to this map showing the counties listed by Countrywide as declining.

Declining-Markets-From-Geocommons

24 comments

24 Comments so far

  1. Jillayne Schlicke February 3rd, 2008 4:59 pm

    I imagine that if redlining were brought up as problematic in reference to “declining market” then that may likely lead to a further constriction of mortgage underwriting guidelines and higher rates on all loans, no matter where the home is located.

  2. Bob in San Diego February 3rd, 2008 7:04 pm

    Countrywide has labeled all San Diego County a declining market.

  3. Sean Purcell February 3rd, 2008 10:00 pm

    Wow!
    When lenders earn a profit helping people into homes with loans that they probably should not have been writing at all… they are racist.

    When lenders try to profit (or more accurately protect what profits they have left) by realizing their mistakes, reigning in their U/W and not continuing a practice that eventually feeds people into foreclosure… they are racist.

    Maybe if the lenders were non-profit everything would work out better.

  4. Jay Thompson February 3rd, 2008 11:18 pm

    That looks like a nuclear explosion in Arizona…

  5. Greg Cremia February 4th, 2008 9:09 am

    If this actually is redlining then who is guilty? The lenders who are implementing these new rules or Fannie Mae who imposed the rules on the lenders?

  6. Jim Duncan February 4th, 2008 9:18 am

    The lenders who are implementing these new rules or Fannie Mae who imposed the rules on the lenders?

    Very interesting.

  7. Ken Smith February 4th, 2008 9:57 am

    “Race is a tricky and always delicate topic, but I just don’t see the parallel between declining values and race.”

    I agree that it’s always a delicate topic. But trying to make this a race issue doesn’t make sense, just look at many of the areas effected. They are just to diverse to try and claim this is a race thing.

  8. Daytona Beach Condos For Sale February 4th, 2008 10:09 am

    Are you sure thats not the wild fires in California?

    Actually interesting how many of those areas also suffered with flooding, fires, tornados and local economic job losses.

  9. […] Here’s a map of the data as done by FortiusOne and published over on Bloodhound on a post about redlining. […]

  10. Austin REALTOR February 4th, 2008 12:33 pm

    Loooking at the southwest, the declining markets look like the ones that saw the our of control appreciation. Was it a race thing that caused prices to rise so quickly? I think not. Is it a race thing that caused the dramatic price decreases, I doubt that too.

  11. Dan Sullivan - Denver Real Estate February 4th, 2008 1:58 pm

    My only problem with the “declining market” restrictions is that they are WAY too broad. Denver County was recently given a declining market distinction. Since the distinction was put in place, several lenders have backed out of the market entirely. For those that still lend in the county, an additional risk fee (usually .25% of the loan amount) is now charged on all loans.

    Denver County is a huge area, encompassing about 25 zip codes. Unfortunately, they are all lumped together, so a zip code like 80211 (+8.98% increase in average sale value) or 80209 (+10.98%) is treated the same as a zip code like 80203 (-10.66%).

    (All figures are a comparison of Q3 residential sales from 2006 to 2007.)

  12. Bob in San Diego February 4th, 2008 3:01 pm

    I can’t really blame them. With values still dropping, it’s a wonder there are loans for anyone with less than a 80% LTV.

  13. Rick Belben February 4th, 2008 7:07 pm

    Hey no matter what the banks and lenders do – not every one is going to be happy .

    It was smiles all around when the money was flowing freely. Now that they are acting truly like a business trying to protect there interest some people are upset.

    I think what they are doing is a far cry from redlining

  14. Bob in San Diego February 4th, 2008 9:51 pm

    When you cite the entire southern part of California, including the state’s two largest cities, it isn’t redlining. It will speed up the decline though, which maybe the goal. The lenders’ way to lance their own boil?

  15. […] Fair assessment of risk or Redlining?, by Jim Duncan. […]

  16. Jim Duncan February 5th, 2008 4:25 am

    As someone said to me in an email –

    “Agree that this is not exactly a redlining issue in terms of race/ethnicity. However, declaring a set of counties that are part of metropolitan areas as “Soft-Market” has implications for new borrowers and those who may want to refinance.

    It becomes a self-reinforcing cycle where decline in property values creates credit crunch which in turn drives down property values…”

  17. Ken Smith February 5th, 2008 10:05 am

    Jim there is no question that this hurts the markets and will speed up the decline. Bob might be onto something with his comment “It will speed up the decline though, which maybe the goal.”

    The quicker the home prices bottom out the less new loans that will be written that will have declining values. Hit the bottom fast and risk is reduced or slow decline with years of new loans that have depreciating homes values holds a high risk.

  18. […] Blood Hound Heat Maps/”redlines” the U.S. […]

  19. Late Night Austin Real Estate Blog February 5th, 2008 11:36 pm

    I think that this will help speed up the decline. Whats interesting is I dont know if Countrywide will be able to survive a fast decline if their buyout doesnt go through.

    As far as redlining. I think it wont be an issue unless they start redlining by zipcode. If they do it by county or cities it seems a little safer.

    Is the crazy bright spot on the west Phoenix?

  20. […] value (as is the assessed value). – We discussed the current state of the Charlottesville market. – Declining markets and “Jingle Mail” – here is an excellent article on this from a professional […]

  21. […] came across this interesting Google Maps mashup from BloodhoundBlog (via Dan Green at The Mortgage Reports). According to SocketSite, Countrywide has a Soft-Market […]

  22. Ben Popken March 2nd, 2008 11:55 am

    It’s important to note that borrowers in the areas labeled as having declining markets are being required to pony up an additional 5% down payment.

  23. gina gardner April 2nd, 2008 3:48 pm

    Those who engaged in redlining in the ’60s didn’t give racial composition as their reason — they said that areas that happened to be dominated by minority groups happened to have higher default rates, higher crime rates, higher insurance claims, whatever. And even if that was true it became illegal to define rates or underwriting based on geography because it was percieved as unfair. And yes, San Diego is not considered The Hood, but that doesn’t mean that lots of declining markets aren’t also heavily populated by minorities. I think designating entire zip codes or counties as declining creates the appearance of impropriety and pulls down areas that were successfully weathering the downturn. What is wrong with doing it the old fashioned way, using the appraisal to assess that exact neighborhood (inventory, time on the market, etc)instead of wholesale labeling of cities or counties?

  24. Sue June 30th, 2008 6:17 pm

    Jim, I don’t see the parallel either.