Sellers Are Rejecting FHA/VA Backed Provides
The Urban Institute (UI) says it appears that the current seller market is having a negative impact on government-secured loans and the borrowers who have to use them. In an article published on UI’s Urban Wire blog, Janneke Ratcliffe and Laurie Goodman write that while rising home prices and historically low inventory of available properties have been good for sellers, many of them are unwilling to accept offers made through FHA – or VA financing are supported.
A recent survey of realtors conducted by the National Association of Realtors (NAR) found that 89 percent of sellers would likely accept an offer from a buyer with conventional financing, but only 30 percent if the buyer were using a government-sponsored loan. Six percent would not even consider such an offer.
UI says data gathered through the Home Mortgage Disclosure Act (HMDA) data shows that such a strict rejection of VA and FHA funding penalizes households with lower incomes, lower creditworthiness and lower wealth, many of them are colored people. This is likely to exacerbate the existing racial home ownership gap.
The UI analysts calculated the share of lending by state and government sponsored companies (GSE) over the past 4.5 years. They do not include bank portfolio loans and private label securities as complete data are not available.
Between mid-2017 and May 2020, the FHA share of purchases ranged between 21.5 and 24.0 percent of the agency market, an average of 22.8 percent. In April and May, however, the number fell to 18.9 percent. The VA share averaged constant 11.5 percent in this early period, but fell to 10.3 percent in these two months. Although some of the decline could be due to home values rising above the FHA loan limits, those limits were raised in January 2021 while the FHA and VA shares continued to fall.
The latest available HMDA purchase data (2019) shows a much higher proportion of FHA and VA borrowers who were Black or Hispanic as compared to traditional borrowers, in some cases more than a 10 point difference. Additionally, 41.9 percent of FHA borrowers and 36.3 percent of VA borrowers were under the age of 35, compared with 33.6 percent of conventional mortgage borrowers.
In its survey of loan types, NAR asked agents what made FHA and VA loans “less attractive” to sellers than traditional loans. Home inspection requirements were high on the list, followed by valuation issues, increased time to close, and low down payments.
Government loans require property inspections to identify health, safety, and security risks such as leaded paint, roof failures, or appliances nearing the end of their useful life. Traditional loans do not require audits and in a stressful market many buyers have either opted not to do so or used them for informational purposes only.
If a home is valued at a lower price than the agreed price, the FHA and VA require the seller to reduce the purchase price according to the appraisal, and if the deal fails, 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 at their own discretion.
Government loans close more slowly, often because repairs are needed. According to Ellie May, it took an average of 57 or 58 days to complete FHA or VA purchase loans in the first three months of this year, compared to 51 days for traditional loans.
Traditional loans typically require either a 20 percent down payment or private mortgage insurance, while government-sponsored loans allow lower down payments, a big reason why they are over-used by first-time, wealthy, and younger borrowers. The authors wonder why a low down payment is a problem for sellers, but they can think of this as a proxy for the security of the deal.
Ratcliffe and Goodwin say there are several things the federal government could do to improve the playing field and make first-time borrowers, colored borrowers, or with fewer fortunes 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 abolishing the home inspection or making it less mandatory, and they could consider more flexible valuation requirements, which in turn are more similar to those for GSE mortgages.
The authors conclude: “Removing these barriers can help government borrowers become more equitable with conventional borrowers. This is just one of many steps that could narrow the racial homeownership gap and make the mortgage market fairer and more equitable for all borrowers. ”