Mortgage lenders are practicing a new type of redlining
Throughout history, money lenders have been portrayed in folklore and literature as bright, calculating people. They’re reputed to know what they’re doing, vetting all of the angles.
That’s an urban legend. As we’ve learned in recent years, often they don’t have a clue.
Some cases in point: When I first broke into the mortgage lending business in the early 1960s, FHA underwriting guidelines strictly forbade making loans to single women. Presumably, they’d get married, have kids, and default on their loans.
Another rule, from the same government agency, specified that a wife’s income couldn’t be counted toward qualifying for a home loan unless it could be positively demonstrated that she could not have children; as everybody knew then, if a family had a baby, they immediately stopped making their mortgage payment.
And, back in those happy days, you could never consider making a loan to a male and female who were not married.
Then, there was the practice of “redlining,” which meant that lenders would, in effect, draw a red line around an urban neighborhood that was deemed to be in decline, and decree that no loans would be made there because the collateral properties were run down. Of course they were; people couldn’t repair them because they couldn’t get loans.
Today, gender discrimination and redlining are illegal under federal law, and the country and economy are better off as a result.
Presently, there’s a new form of redlining rampant, and it makes about as much sense as the classic variety.
If a property is unique, or unusual, there’s a very good chance that it doesn’t qualify for conforming mortgage financing because of the lack of so called “comparable” properties. Fannie Mae and Freddie Mac (you remember, the gang that cost American taxpayers hundreds of billions before the suits from Treasury walked in) have determined that the value of the property can’t be determined without comparable sales that adhere to strict standards of analysis.
Like redlining, there’s a kernel of truth in the policy. Of course, back in the day, your collateral was better in Malibu than in East L.A. And, if the comparable sales approach is the main determinant in the valuation of a home, the lack of comparables can pose a problem. But unique doesn’t mean without value, and often just the opposite. There’s only one Taj Mahal, and it’s probably worth something.
There are some very good one- to four-family residential properties that often have few comparables: fourplexes and especially triplexes. To exclude from conforming financing these that lack comps makes no sense at all.
Of course, there’s what we mortgage lenders and bankers will say is a good reason for this (just as we swore, back in nineteen aught sixty two, that you shouldn’t make a loan to a woman).
Fannie and Freddie buy single family residential loans from originators, package them into mortgage backed securities, and sell the paper to investors worldwide. The agencies warrant that the underlying loans meet detailed criteria relating to underwriting, valuation, and a host of other benchmarks. Any loan that doesn’t meet the guidelines, even as relates to one, apparently minor, item is kicked out of the pool.
This issue could be obviated by grading tiers of securities, with a small premium added for unique properties.
The impracticality of the new redlining might best be demonstrated by the agencies’ stance on solar power, which results in an oxymoronic dichotomy. They say that they want to lead the charge in “going green,” but they then steadfastly refuse to purchase loans on solar powered homes if there are no comparable properties in the area.
Well, yes; if no lenders will lend on these homes, there won’t be any. Just like, sure enough, women didn’t make mortgage payments in the ’60s because they couldn’t get mortgages.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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