Ken Harney in today’s Washington Post:

Could designations of Zip codes, metropolitan areas and entire states as “declining markets” hinder a real estate recovery and hurt minority groups and moderate-income buyers disproportionately? Growing ranks of critics say yes.

Since late 2007, most lenders, insurers and mortgage investment firms have compiled lists of markets that they regard as higher risks because housing values are dropping. In those areas, borrowers are charged higher rates and loan fees and are required to make bigger down payments — costs that can rise significantly when applicants have credit scores below designated minimum levels.

In some cases, the extra fees can add more than two percentage points to the interest rate and require much more cash up front. At their extreme, declining-market designations remove entire categories of real estate from financing eligibility. Some private mortgage insurers, for instance, won’t touch second homes or rental-home investments anywhere in large swaths of Florida and California.

Industry estimates on affected Zip codes range from 8,000 to more than 12,000 across the country. Many parts of the Washington area are included.

Full story here.

Following is just-in from NAR’s Joe Ventrone (Vice President of Regulatory and Industry Relations):

Over the past few months, the GSEs (Fannie Mae and Freddie Mac) along with the Private Mortgage Insurance Industry (MIs) have been increasing fees and tightening up underwriting standards. This is a direct result of the mortgage crisis which surfaced last August. NAR is communicating with the GSEs about these changes and raising concerns about their impact on the market and unintended consequences. For example, the declining market policies may be stigmatizing entire markets and unfairly denying homeownership to homebuyers, especially minority and low income homebuyers. Although the recent GSE actions will have a significant impact on the mortgage and housing markets, we recognize they have suffered serious financial losses in recent quarters and their goal, like ours, is to make sure they are strong enough to continue making the secondary market work. Without the GSEs, the current crisis would have been much worse.

The following factors may help explain recent GSE decisions:
• These are essentially private entities that are universally losing billions because the mortgage markets in the last several years failed to apply strong underwriting standards.
• After what has happened in the mortgage market, with hundreds of billions of losses, a period of retrenchment is inevitable. A return to zero down mortgages is unlikely, which is not necessarily a bad thing.
• The FHA mortgage insurance program is a sound alternative for subprime and many Alt-A borrowers, People with weaker credit and a small downpayment should consider using FHA. There is a long history of FHA filling that role, and we expect the pending FHA reform legislation to help revitalize its programs and make them even more accessible.
• If Fannie and Freddie are charging too much and setting their standards unnecessarily high, considering the risk, there will be an opening for others to compete. Unfortunately, considering how cautious banks and other mortgage lenders have become, this could take considerable time.
Attached please find an update from our Real Estate Services program which was drafted by NAR consultants. This update provides up to date information on the current state of the mortgage market.

These are very trying times for our mortgage finance system, our members, and the American homebuying consumer. We at NAR are keeping abreast of up to the minute changes from the mortgage lending industry as well as the GSE’s and the financial regulatory agencies. In this regard, we continue to work with the GSEs on their declining markets policy. Please visit www.Realtor.org for current information. Please do not hesitate to call any of the following NAR staff if you have any questions.

NAR Contacts

FHA Programs Regulatory Contact:
Jerome Nagy, jnagy@realtors.org <mailto:jnagy@realtors.org> , 202.383.1233

FHA Programs Legislative Contact:
Megan Booth, mbooth@realtors.org <mailto:mbooth@realtors.org> , 202.383.1222

GSE Programs Regulatory Contact:
Jeff Lischer, jlischer@realtors.org <mailto:jlischer@realtors.org> , 202.383.1117

GSE Programs Legislative Contact:
Marcia Salkin, msalkin@realtors.org 202.383.1092