Real Recovery Starts with Investor Lending Changes
- January 30, 2017
This is the best window of opportunity of our lifetime to procure real estate for long-term hold. Unfortunately, the pendulum at capital hill and Wall Street overreacted to the short-term speculative investors at the height of the bubble and has swung too far back to conservative terms for investor loans, thus impeding the ability of investors to get homes off the market and occupied.
This is not just a problem for investors who want to further build their retirement portfolios and reduce their personal dependence on the country's overburdened social programs. It is also a serious detriment to this country's economic need to accelerate the process of rectifying our debt crisis from underwater real estate.
Currently 25% of the nation's and 35% of California's home loans are upside down in spite of over three years of a high rate of foreclosure sales. And yet the rate of foreclosure sales is less that a quarter of the rate that they should be relative to the rate of delinquencies. This has resulted in a "shadow housing inventory" of 42 months at the current absorption rates. So far. As a nation it appears that if something doesn't change it will take 4-7 years to get to a more normal and sustainable home sales environment and continuum.And as if this situation were not enough, to further amplify the problem, only 33% of sellers and those losing their homes are willing or able to repurchase. That's right, 67% of former homeowners have moved from buying to renting. We have an escalating problem of unsold homes sitting on the market. If owner occupants cannot absorb two-thirds of the housing inventory, who will?
And as if this situation were not enough, to further amplify the problem, only 33% of sellers and those losing their homes are willing or able to repurchase (Table 3). That's right, 67% of former homeowners have moved from buying to renting. We have an escalating problem of unsold homes sitting on the market. If owner occupants cannot absorb two-thirds of the housing inventory, who will?
Clearly the only ones who can do that are investors. Not only do they absorb foreclosure inventory and provide housing, but by using their capital for improvements they also remove blight from neighborhoods, thereby improving property values and local tax revenue.
If more investor financing is made available, the absorption rate will accelerate and with it the end of our real estate crisis becomes more tangible. Historically, the real estate economy has always played a leading roll in our national recovery from recessions.
What do investors need to move forward? I believe the following three-year changes in loan policies:
- Increase the amount of available loans to qualified investors to an unlimited number for three years (as it was in the past)
- Make the 203K loan program more available to investors (loans that include funds for improvements)
- Allow "simple assumptions" of any Fannie, Freddie, or FHA loans
- Allow equal access to all government-owned inventory for investor and owner-occupants alike
- Accept more reasonable cash reserves requirements
What do lenders have to lose by these changes? Very little. The long term investor delinquency rate is no higher than that of owner occupants and it is actually lower for FHA loans. Current and traditional investors are not speculators; they add value and experience to the process of turning empty homes into family homes. Finally, many of the changes that investors seek are roll-backs to the policies in place before loosening of lending policies fueled purchases by under-qualified buyers. Investors don't just want, they know these changes are essential to the recovery of the real estate market in the U.S.
To promote these ideas with the policy makers at Fannie Mae and HUD, I recently joined Howard Blum, President of The Financial News and Information Service, Bruce Norris, President of The Norris Group, and Sean O'Toole, CEO of Foreclosure Radar, in Washington D.C. to discuss the potential of easing the requirements for investor loans. Our audience of 15 including, 6 vice presidents, demonstrated that Fannie Mae and HUD are serious about wanting to improve the situation and are willing to consider new ideas. They felt that since multiple rental properties can be justified and supported by income rather than just borrower financials, a hybrid product could be considered that is a bridge between traditional residential and multifamily loans. The main hurdle yet to overcome is framing a policy that would be politically acceptable to both congress and the public.