Red Lining—Alive and Well in Real Estate.
December 12th, 2008 Categories: "Say What? Just Some Real Estate Talk
Red lining. An insidious act that creates barriers and walls off people and neighborhoods by either financial or some other type monetized quantification.
It’s negative transformation at it’s best. Collusion between financial institutions at all levels and appraisers either willingly or unwillingly, directly or indirectly with greed as its motivation.
It appears to be quite prevalent in real estate today and I suspect if one were to undertake a study they would find a correlation between high foreclosure areas such as San Bernardino County, Santa Paula, Fillmore areas and red lining.
The starting point for this disease I suspect is high up in the bundling of mortgages for re-sale on the secondary market (Freddie Mac and Fannie Mae). Meaning that most lending institutions and banks who do not maintain mortgage notes that they have negotiated as part of their own portfolio become active participants to this cancerous disease.
Redlining is a word used to describe an illegal practice of discrimination against a particular group.
It occurs (unilaterally) when, for instance, lenders decide certain areas of a community are too high a risk.
The net effect is that real estate lending institutes who red-line generate barriers by either refusing to give a mortgage to buyers who want to purchase property in those areas, regardless of their qualifications or creditworthiness or make it so difficult that the purchase cannot be pursued.
Today what appears to be occurring regularly are properties in high foreclosure areas are being re-evaluated days before the close of escrow and a pre-conceived (contrived) opinion made and justified (ie., drive by appraisal) designed to decreases a property’s value from 10% to 35% less than the original appraisal taken a few weeks earlier.
Now the lending institution is not saying that it will not make a loan but the action pits the buyer and seller against each other with the buyer wanting to purchase at the lower appraised value and not the contract price negotiatied and agreed to previously.
This slight of hand by the lending institutions generates a depressed sale if the seller has to sell or forces the buyer to come in with more funds to complete the purchase.
The instigator (the bank) sits by and waits for the chips to fall, immune of any responsibility or wrong doing. If challenged it becomes a case of finger pointing and feign incredulity that they would be accused of doing something of this nature. There appears to be limited or no re-course for a seller to challenge these contrived actions.
Is it illegal? The Federal Community Reinvestment Act of 1977 supposedly put an end to real estate red lining. However over the years it appears that legislation may have been enacted which minimized the intent of the 1977 Act or the intent of the act is simply being ignored.
Today, because of the current foreclosure mess, it appears that anything and everything is allowed using the excuse that normality has to be brought into the market place. Essentially it is turning a blind eye to a bad situation.
The amusing thing (if one can call this amusing) is that the institutions who created the foreclosure mess with exotic mortgage products now have flipped to the other side and appear to be the van guards in red-lining high foreclosure areas. Why? They will probably say these areas are poor economic risks.
In effect what is being created is a false market (relative to property value) at the expense of sellers in those areas and supporting the continuation of a down market.
Your comments are welcomed.
