It is strange but true that the most universally agreed-upon tragedy in American real estate is falling prices, otherwise known as more affordable prices. But the actual tragedy is that the people who need affordable homes the most today can’t buy them: banks today often won’t lend money to reach-up buyers and, when selling foreclosed homes, banks won’t take their money either.
The problem is that the programs designed to ease credit for the middle class, Federal Housing Administration (FHA) and Veterans’ Administration (VA) loans, impose rules that have completely diverged from the new realities of a distressed market. Banks liquidating as-is properties at fire-sale prices will almost never agree to the repairs needed to make a home move-in ready, as required by FHA and VA loans. And banks aren’t waiting for additional inspections, appraisals or paperwork required by FHA and VA loans.
The result: anyone who hasn’t amassed a small fortune, including many vets, first-time home-buyers and small-business owners, are effectively disqualified from buying the most distressed properties, which usually sell at a 30% discount to neighboring listings. What these buyers are missing out on isn’t just a tiny slice of the market. In cities like Phoenix, Miami and Las Vegas, distressed properties are the market, with more than half the home sales being sold or approved by banks, not occupants.
So even as we preside over one of the rare moments in American history when property forcibly changes hands – on a scale akin to the Oklahoma land rush if not the Russian Revolution – new lending rules ensure that this transfer not only impoverishes the middle-class people forced out at the market’s nadir, but enriches the wealthy who buy the abandoned home with cash. Nearly a third of all home sales are now all-cash deals, many bought by hedge funds.
The banks selling houses have not been subtle about their preference for investors. In the listing remarks that often only agents can see, the bank owning the property outlines the financing options it will accept for a home, excluding veterans and first-time home-buyers using Veteran Affairs (VA) and Federal Housing Authority (FHA) loans.
We know from first-hand experience that banks tell the real estate agents hired to sell these homes to reject any offer based on a VA or FHA loan. Even when there’s a bidding war, the banks selling foreclosed properties want a sure, easy sale more than an extra $20,000, particularly when appraisals for new loans have become, for many listing agents, a game of Russian roulette. What matters in today’s market is how much money you have, not how much you’re willing to pay.
One of Redfin’s Denver clients, Joel Brown, a master sergeant who served during the Iraq War, got this news in writing, and recently appeared on the Denver news to talk about it. Joel’s agent has asked time and again: “why would the banks spurn a vet making an offer, especially if he wants to pay more?”
The answer isn’t surprising, or even particularly diabolical. You can’t blame banks digging through a backlog of more than one million foreclosed homes for trying to sell properties as-is, FHA and VA rules notwithstanding. Getting a VA or FHA loan approved is also more hassle for the bank’s real estate agent, and the delays associated with government-backed loans often put off everyone who’s anxious for a quick sale.
Joel just came to terms on the sale of a conventional listing, so it’s not as if he’ll be homeless as a result. It’s just a surprise to find a buyer shut out of the best deals for using a government-backed loan. What’s galling is that investors getting those deals often turn around and sell the place at a mark-up to the buyers who just lost out due to their financing.
As a result, the people who should benefit most from more affordable housing often describe the house-hunting experience as frustrating and demoralizing. Many real estate agents dread representing buyers with FHA and VA loans. Often the buyers themselves just give up. This isn’t an abstract or occasional possibility for Redfin; it has been the experience of probably more than a thousand of our customers. A market that should be a home-buyer’s paradise is quite the opposite.
This paradox is deepening the real estate crisis. You rarely see individual sellers refuse to consider FHA or VA buyers; these sellers can’t afford to turn away anyone who might pay a higher price. But even as foreclosures gut neighborhood homes prices, this is what banks are doing.
Fortunately, there’s a simple solution to the problem: just as it’s a Fair-Housing-Act violation to reject buyers for being African-American or Asian-American, it should be against the rules to reject buyers sight unseen for using a VA loan. For such a rule to be practical, VA and FHA standards requiring repairs to be made before a sale occurs should be relaxed and timelines shortened; lenders should be concerned only with whether the house is sufficient collateral for the loan, not with whether patio stairs need a new railing before closing. Programs for selling government-owned foreclosures to occupants rather than investors should also be expanded.
Such changes would not be unwarranted or irresponsible government meddling. We can extend credit to vets and first-timers without returning to liar loans and wink-wink appraisals, as the safeguards now required for conventional loans are mostly sufficient for VA and FHA loans, even with the lower down-payments.
It would be easier to argue for letting the market run its course if the U.S. hadn’t taken vigorous, unprecedented steps to drop interest rates to historic lows, all while doing very little to allow the easy money to reach beyond Wall Street to Main Street. Already the world’s wealthiest people are richer than they were before the credit crunch. The new home-buyer, the bailed-out bank, the neighbor hoping for the return of higher prices, don’t have to be poorer in the exchange.