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How to Fight for
Market Recovery
By pushing for more investor-finance options,
brokers can help offset inventory glut
Active real estate investors regularly
observe the condition of lender-owned
properties, many of which are in various states of disrepair and neglect —
kitchens are torn up or completely
ripped out, windows are broken
and pools are a brilliant shade of
algae-green.
In today’s market, few lenders will
finance a purchase of such a fixer-upper. Moreover, mortgage brokers
will find even fewer homeowners with
the expertise or willingness to take on
the demands of such a property. That
leaves investors as the primary group
of potential buyers.
Unfortunately, investors can’t purchase houses in sufficient numbers
to eliminate the impending growth of
lender-owned properties. Investors’
inability to help solve the ongoing
real estate crisis is largely because of
existing restrictions in banking policies and government regulations.
An opportunity exists, however,
for mortgage brokers to use their
knowledge of banking regulations,
government policies and investor capabilities to lobby lenders and federal
regulators for much-needed changes
in lending policies and regulations.
Despite the importance of investor purchases of fixer-upper properties — particularly in light of ongoing
troubles in the housing and job markets — most lenders won’t fund more
than four rental-property loans to
investors.
This prevents many well-capital-ized investors from buying more
properties or completing 1031 like-kind exchanges, both of which can
help solve the current crisis. Removing arbitrary limits on the number
of loans made to investors can help
spur recovery.
The Federal Housing Administration
(FHA) also could help national recovery by offering investor loans under
its Section 203(k) program. The loan
program allows a property needing
work to be purchased as-is and includes money in the loan amount for
repairs. FHA previously made this loan
available to investors but stopped the
practice in 1996 when the U.S. Department of Housing and Urban Development (HUD) placed a moratorium on
investor participation. According to
the HUD Web site, the Section 203(k)
By Bruce Norris
President
The Norris Group
program (
sctsm.in/HUD203k) is the
department’s “primary program for
the rehabilitation and repair of single
family properties.”
Brokers also should consider encouraging lenders to allow new buyers
to take over existing loans without formal assumption. Through this process,
which was successful in the 1980s,
buyers would be able to easily step
in and take over loan payments. One
stipulation: Each loan would have to
be made current at the close of escrow.
Allowing investors to take over loans
would help contain the spread of foreclosures across the country and accelerate the market’s recovery.
“Despite the importance
of investor purchases
of fixer-upper
properties
… most lenders won’t
fund more than four
rental-property
loans to investors.”
Federal stimulus funds could provide additional relief. President Barack Obama has indicated that no
federal stimulus money would go to
investors to solve the national real
estate crisis. The administration instead plans to use this funding to
help owner-occupants refinance or
renegotiate their current loans.
It is not possible mathematically,
however, for owner-occupants to absorb the entire foreclosed-housing
inventory in this country. The percentage of people owning their own home
inside the nation’s 75 largest metropolitan statistical areas stood at 62 percent or less from 1986 through 1994,
according to the U.S. Census Bureau.
That figure jumped to almost 68 percent by 2004, in part because lenders
abandoned traditional guidelines and
embraced subprime (aka, nonprime)
loans. This means that lenders likely
will end up owning as much as 6 percent of our nation’s homes.
In light of these statistics, who besides investors possibly can qualify to
purchase these properties in today’s
market? If mortgage brokers want to
ride out the ongoing storm, they must
get involved and lobby lenders and
the federal government to implement
the types of reforms fundamental to
recovery. Instead of remaining on the
sidelines, brokers have an opportunity to be part of the solution. •
Bruce Norris is a Riverside, Calif.,-based
real estate investor, analyst, educator and
president of The Norris Group. He correctly
forecast the real estate boom that began
in 1997, the subsequent doubling of home
prices and the ensuing subprime mortgage
crisis, the latter of which he documented
in his 2006 report titled “The California
Crash.” Visit www.TheNorrisGroup.com or
reach Norris at (951) 780-5856.
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