In an increasing effort by banks to tighten up the lending process and mitigate risk, some are requiring a larger down payment if you happen to live in a zip code on their “declining markets” list.
As reported by nationally syndicated columnist Kenneth Harney in Sunday’s Chronicle, Countrywide Financial has labeled each of the nine Bay Area counties with a risk ranking of 1 through 5 — with 5 being the highest perceived risk. Alameda, Contra Costa, Solano, and Sonoma counties are all labeled as a “4” and therefore most borrowers are being required to come up with a 5% larger down payment than normal. San Francisco, Marin, San Mateo, and Santa Clara counties are all ranked “2”, while Napa is the lone “3” of the group.
This is the first public report I have seen on this new approach taken by lenders, but I personally experienced this when getting rate quotes from one of my mortgage brokers back in late November. Minimum down payment on a typical jumbo mortgage in San Francisco was 10%, whereas if I wanted to spend the same amount of money on a house in Oakland, I was going to have to come up with 15%. While I have since postponed any purchase of property for the foreseeable future, that 5% difference was, and still is, a substantial one.
So, what does this mean? First, I believe it helps accelerate the downward pricing pressures in these counties with high rankings. These are mostly the outlying areas that experienced some of the highest appreciation rates and even more out of whack price-to-income ratios. So they stand to fall further once the party is over, and by requiring higher down payments during this inevitable correction process, it will likely help us get to the bottom sooner by taking some buyers out of the equation—which I view as a very good thing. Most buyers in recent years were putting zero to very little down on home purchases, so to suddenly increase the requirement by 5%, in addition to other recent tightening of lending requirements, it makes for a very big deal.
Will San Francisco, Marin, or the Peninsula be next to receive a higher risk ranking? I think so, but we will have to wait and see…