The Urban Institute (UI) says it appears that the
current sellers’ market is having a negative impact on government backed loans
and the borrowers who need to use them. In an article posted on UI’s Urban
Wire
blog, Janneke Ratcliffe and Laurie Goodman
write that, while soaring home prices and historically low inventories of
available homes have been good for sellers, many of them are unwilling to
accept offers backed by FHA or VA financing.

In a recent survey of agents conducted by
the National Association of Realtors (NAR) found 89 percent of sellers would be
likely to accept an offer from a buyer with conventional financing, but only 30
percent
if the buyer were using a government-backed loan. Six percent would not even consider such an offer.

UI says that data collected through
the Home Mortgage Disclosure Act (HMDA) data shows that such flat-out rejection
of VA and FHA financing disadvantages households with lower incomes, lower
credit scores, and less wealth, many of whom are persons of color. This is
likely to exacerbate the existing racial homeownership gap.

The UI analysts calculated the share
of government and government-sponsored enterprise (GSE) purchase loan
originations over the past 4.5 years. They did not include bank portfolio loans
and private-label securities due to a lack of complete data for them.

Between mid-2017 and May 2020, the
FHA share of purchase originations ranged from 21.5 to 24.0 percent of the
agency market, an average of 22.8 percent. The number, however, has dropped to
18.9 percent in April and May. The VA share averaged a steady 11.5 percent over
that early period but dropped to 10.3 percent in those two months. Though a
piece of the decline might be due to home values rising above FHA loan limits,
those limits increased in January 2021, while the FHA and VA shares continued
to drop.

 

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The latest available HMDA purchase
data (2019) shows a much higher share of FHA and VA borrowers were Black or
Hispanic compared to conventional borrowers, in some cases more than a 10 point
difference. Also, 41.9 percent of FHA borrowers and 36.3 percent of VA
borrowers were younger than 35, compared with 33.6 percent of conventional
mortgage borrowers.

In its survey of loan types, NAR
asked agents what makes FHA and VA loans “less attractive” to sellers than
conventional loans. Home inspection requirements topped the list, followed by
appraisal issues, longer time to close, and low down payments.  

 

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Government loans require property inspections
to detect health, safety, and security risks such as lead paint, failing roofs,
or appliances nearing the end of useful live. Inspections are not required for
conventional loans, and in a tight market many buyers chose to forego them or
use them only for informational purposes.

When a home is appraised for less
than the agreed-upon price, FHA and VA require that the seller must reduce the
purchase price
to match the appraisal and if the deal falls apart, the
appraisal stays with the home for 120 days. With conventional financing, the
parties can renegotiate the price and the buyer can make up the difference if
he/she chooses.

Government loans are slower to
close, often because of needed repairs. According to Ellie May, it took an
average 57 or 58 days to close FHA or VA purchase loans in the first three
months of this year compared to 51 days for conventional loans.  

Conventional loans typically require
either a 20 percent down payment or private mortgage insurance, while
government-backed loans allow lower down payments, a big reason they are used
disproportionately by first-time, low-wealth, and younger borrowers. The authors
question why a low down payment would be a concern for sellers, but they may view
it as a proxy for certainty of closing.

Ratcliffe  and Goodwin say
there are several things the federal government could do to level the playing
field and make first-time borrowers, borrowers of color, or with less wealth, more
competitive in the housing market. First, the rules for FHA and VA could be
more closely aligned with those of Fannie Mae and Freddie Mac. The Department
of Housing and Urban Development (HUD) and the VA could consider either
eliminating the home inspection or making it less prescriptive and they could
consider more flexible appraisal requirements, again more akin to those for GSE
mortgages.  

The authors conclude that, “Reducing
these barriers can help government borrowers gain more equal footing with
conventional borrowers. It is just one of many steps that could shrink the
racial homeownership gap and make the mortgage market fairer and more equitable
for all borrowers.” 

By Jann Swanson , dated 2021-07-06 16:07:44

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Courtesy of Mortgage News Daily

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