Two of the Nation's Capital's biggest companies -- Fannie Mae and Freddie Mac -- are under fire from consumer and industry groups over their controversial "declining markets" lending policies.

Both companies charge borrowers higher downpayments and fees when properties are located in areas where the companies believe prices have dropped.

Private mortgage insurers -- who work hand in hand with Fannie and Freddie by writing coverage on loans with downpayments less than 20 percent -- are enforcing even more extensive and restrictive lists of declining markets. Some industry estimates put the total number of Zip codes affected across the country at between 8,000 and 12,000.

Critics say such designations are simply a new form of redlining: Timothy Sandos, president and CEO of the National Association of Hispanic Real Estate Professionals, says they make buying homes disproportionately more costly for minorities and moderate-income families who can't afford the higher downpayments and fees.

Labeling an area as "declining" becomes a "circular, self-fulfilling prophecy," says Sandos -- lowering sales, and ultimately prices.

Joining with the National Association of Real Estate Brokers, which represents black realty professionals, and the Asian Real Estate Association of America, Sandos' group recently asked Fannie Mae and Freddie Mac to "reverse" their punitive policies, or to create a single, transparent list that all industry participants could follow.

The National Association of Realtors, in letters last week to Fannie's and Freddie's chief executives, went a step further: N.A.R. president Richard Gaylord asked the companies to "discontinue the policy of stigmatizing entire Zip codes or metropolitan areas" as declining since they "typically include widely differing" local neighborhood conditions.

The Realtors carry a lot of weight with Fannie and Freddie - and have been among their most steadfast defenders on Capitol Hill. A Fannie spokesman said the company has heard the critiques on declining markets designations, "and we take (them) seriously."

Freddie Mac said through a spokesman that it is "re-evaluating" its policy.

So, should buyers, sellers and real estate professionals expect any big changes in the numbers of areas tagged as declining and hit with higher downpayments and fees?

Not overnight. But Fannie and Freddie are politically-savvy. They know it's never in their interest to have Hispanic, black and Asian groups upset with them.

Nor is it smart to ignore the 1.3 million-strong Realtors, who have direct access to the Senate and House leaders who control Fannie and Freddie's destinies.

Look for some form of overhaul of the declining markets system in the months ahead … and perhaps some finer tuning on how to handle metropolitan areas that contain both appreciating AND depreciating sub-markets within their boundaries.

We'll keep you posted.

Published: April 28, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.