New Government Policy: Redlining!

Starting June 1st, the GSEs plan to begin redlining. Seriously. The way it works is that the GSEs will implement a sliding scale of maximum loan-to-value (LTV) ratios for loans that they buy. If your home is in a “declining market,” then the maximum LTV for your loan product, given other influencing factors (property type, loan type, et al) will be reduced by five percentage points.

It is called the “Maximum Financing in Declining Markets” policy.

Redlining is when lenders don’t make loans available to borrowers in certain neighborhoods. Hmmm. I, for one, see an overlap between redlining and what the GSEs are proposing.

Geography matters. Right now, it seems like the expectation is that the declining areas will be determined at the zip code level. It works like this — if you are considering buying a home in a “declining” zip code, then your lender’s chances of selling your loan to the GSE will depend upon the borrower making a higher down payment.

A declining zip code is one where home prices have dropped by more than 1 percent in the last two quarters or have declined overall from the last year.

In a neighborhood where the average home value is $200,000, then this policy will mean that borrowers must come up with an additional $10,000 in their down payment.

Some technical explanation: Loan-to-value is a term that describes the amount of the loan, compared to the amount of the appraised value of a home. A higher loan-to-value is often risky, under the logic that with some “skin in the game,” borrowers are less likely to default. It’s probably true. Yet if a borrower needs a higher down payment, this certainly changes the scale of demand for a home.

This policy affects manufactured home buyers who also want to borrow to buy the land where their properties are located. Those would be borrowers who can get real property mortgages. Fannie and Freddie will buy those loans. To the extent that manufactured homes are often in distressed areas (rural areas, places with scores of lost jobs, et al), then this policy will curb the liquidity for lenders making those loans.

The larger furor should be from homeowners in general. It is hard enough to sell your home when there is a nine month inventory of homes on the market. Now you may have to do it without the benefit of the GSEs. Even the Realtors are with the consumer advocates on this one.

~ by samsondoggie on April 24, 2008.