As they scrambled to switch lenders this weekend, one couple trying to buy a house in Oak Park learned the latest lesson about buying a house in the U.S.:
Home buying is getting more complicated and, if you’re a first-timer, it can get more expensive, too, as of this week.
Doug Schenkelberg and his wife, Rachel Unruh, say they were told late last week by their lender that as of March 3, ZIP code 60304 would be identified as a declining market by Fannie Mae and that, to buy a house in that ZIP code, they would have to make a down payment of an additional 5 percent. Of the four ZIP codes in Oak Park, 60304 covers neighborhoods south of Madison Street.
The mortgage lenders who asked Schenkelberg and Unruh for more money up front are reacting to restrictions imposed by Fannie Mae and Freddie Mac in January.
A new rating system that uses the ZIP code of a house to rate the risk of a loan for it can result in an area’s designation as a “declining market,” which is usually based on home prices, an oversupply of houses or the number of days houses in that area have sat on the market. Sales prices in Oak Park have consistently increased in both the single-family and condo markets.
The new automatic flagging of areas as declining markets-fallout of both last year’s dismal fourth quarter home sales and of the ongoing crisis of subprime lending-particularly wounds people like Schenkelberg and Unruh, who are looking to buy their first house and are coming in with a minimum down payment.
“The quality of our loan was being determined not by our desirability as buyers-which we are told is stellar-but by where we were choosing to buy. It felt like redlining,” said Doug Schenkelberg, who is planning to move his wife and son from Chicago’s north side to a house on South Ridgeland.
Because Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Mortgage Corp., buy most home loans today, their underwriting practices are usually adopted by banks and mortgage companies.
These underwriting practices-which apply broad-brush standards to areas as large as counties and entire ZIP codes-have trickled from the much-talked-about hotbeds of risky home loans in Florida, California and Nevada to the presumed security of established suburban strongholds such as Oak Park and River Forest, and nearly all of the Chicagoland area.
Rob Breymaier, executive director of the Oak Park Regional Housing Center, said his organization has been able to verify that 60304 has been redlined.
“Fannie Mae is making it harder for borrowers to buy homes in certain areas. It’s simply a geographical distinction that has nothing to do with proper underwriting guidelines,” he said.
Some critics nationally are calling underwriting based on anything other than a property’s appraisal and the loan applicant’s income and qualifications a new redlining, because the so-called declining markets are often neighborhoods of low-income or minority families.
“This policy can be a self-fulfilling prophecy of driving prices down,” said Unruh.
Oak Park’s landmark Fair Housing Ordinance, which is approaching its 40th anniversary this year, sought to end the practice of appraising property values based on demographic, ethnographic or, in this case, geographic information.
Village president David Pope stresses that the greater problem has nothing to do with just ZIP code 60304.
“This is a requirement that appears to have been imposed by the mortgage lending industry on all of northeastern Illinois,” said Pope.
Pope said that in conversations with bankers, they have indicated that the new requirement will affect no more than one in 20 home purchasers in Oak Park.
Claude L’Heureux, senior vice president of Community Bank of Oak Park and River Forest, acknowledge this as “a fair statement.”
In seeking another lender over the weekend, Schenkelberg and Unruh approached Community Bank to see if a better loan could be negotiated.
Steve Comparone, a loan officer at Community Bank, said that because Schenkelberg and Unruh both had excellent credit scores, he was able to find them a loan through Freddie Mac that did not require an additional down payment.
“As of March 3, anyone purchasing a home in this ZIP code is susceptible to that declining market,” Comparone confirmed.
L’Heureux said that the national problem came to the bank’s attention because of the situation that Schenkelberg and Unruh stumbled into.
“It’s been a little bit of a wake up call for us,” he said.
Radian, a private mortgage insurer, has compiled a nationwide list of declining markets on its Web site, www. radian.biz. In two clicks from the site home page, you can see that all ZIP codes in Oak Park and River Forest are listed as declining markets. Radian’s list, which totals 200 pages, is significant because it shows that almost no region of the country is immune to the “declining market” red flag.
Adding to the complexity of the latest chapter in the nation’s home buying story are two recent announcements from the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac.
The home mortgage companies said Monday that they would stop buying loans from lenders who do not use independent home appraisers. And just last week, the federal housing oversight office said that it would remove restrictions on the amount of loans and securities the two mortgage lenders can own. Both measures were intended to improve underwriting practices while expanding the number of loans that can be provided.
Drawing the ire of many opponents, they stress that most of these new policies address how many loans Freddie and Fannie can give out-and where they can give them-rather than the most important question, which created the subprime mess in the first place:
To whom?
“This has angered quite a few people, not only in Oak Park but throughout the Chicagoland region,” said Comparone.
