Redlining?

Folks in Oak Park, IL are upset that Fannie Mae has reinstated a policy requiring home buyers to put down a 5% larger down payment in a "declining market" than would otherwise be required. As far as I can tell via Google, this will only affect folks trying to buy a home with a down payment of less than 5%, and it seems to me that these days all real estate markets are declining. According to Zillow, my own home lost $2K of value last month, and is now worth less than when I bought it 4 years ago.

Because this new policy has been deemed to apply to their ZIP code, folks in Oak Park feel unfairly targeted, and are calling the new policy redlining, a term from the racial integration battles of the 1960s. They feel the new policy will have a disparate effect on "communities of color" (their term) and "low-income communities" (which Oak Park certainly is not, so far as I can tell.)

I applaud Oak Park for long-term success in remaining racially-mixed since the '60s. A memory from back then was hearing Saul Alinsky in the nearby Austin neighborhood of Chicago happy because two neighborhood groups, one for and one against integration were both meeting in the same building at the same time. Alinsky didn't care that the groups had conflicting goals; he was just happy to see folks getting organized. Up to that point, "white flight" had been converting all-white neighborhoods on that side of Chicago into non-white neighborhoods at a rapid clip, but that stopped in Austin as Oak Park integrated successfully.

Why would anyone in today's market be approved for a home loan with less than a 5% down payment? In a market declining nation-wide, there's simply too much risk a buyer with a lower down payment and their lender would quickly find themselves with a home no longer worth what it cost. There's no way I would make such a loan, either now or in the recent glory days of appreciating home prices.

If I wouldn't make such a loan myself, on what basis can I expect Fannie Mae (the Federal National Mortgage Association) to do so? Although government-sponsored, Fannie Mae is not government-funded and not a charity, so ultimately its financial decisions have to at least break-even or it goes out of business.

It's painful when you're buying a home and prices go South instead of North. But that happens in real estate, about once every twenty years. We've experienced it twice before ourselves, and had to sell our home in the midst of the downturn both times. The first time, we were happy to break even. The second time we sold for a loss but also bought a home sold at a loss at the same time, so we figure we again came out even.

i remember how hard it was to round up the funds for a down payment. But in declining markets, if you can't round up even a 5% down payment, perhaps this year it would be better to continue renting and saving toward a larger down paymen, ideally 20%, though we only managed to save up 10% when we first bought a home ourselves.

Similarly, adjustable rate mortgages are just too risky to recommend for anyone planning to keep a home more than 2 or 3 years. And anyone NOT planning to keep a home that long is probably better off just renting. Once you factor in the costs of selling, it's extremely difficult to make money on a home you keep for under 3 years, even in a rising market.

Unfortunately, that advice affects more "low income communities" than rich ones, but my preference would still be to help folks learn good financial habits, rather than take on risky loans. What good is it to help folks "buy" a home they end up not being able to keep?