The Urban Institute (UI) says it appears the current seller’s market is having a negative impact on government guaranteed loans and the borrowers who must use them. In an article published on UI’s Urban thread blog, Janneke Ratcliffe and Laurie Goodman write that while soaring house prices and the historically low inventory of available homes has been good for sellers, many of them 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 used a government guaranteed loan. Six percent would not even consider such an offer.

The UI says that data gathered through the Home Mortgage Disclosure Act (HMDA) data shows that such an outright rejection of VA and FHA financing puts low-income, low-credit, and low-income households at a disadvantage. wealth, many of whom are people of color. This risks exacerbating the existing racial gap in homeownership.

Unemployment insurance analysts have calculated the share of purchase loan issuance by government and government-sponsored enterprises (GSEs) over the past 4.5 years. They do not include bank wallet loans and private label securities due to a lack of complete data on them.

Between mid-2017 and May 2020, the
FHA share origins of purchase ranged from 21.5 to 24.0 percent of the agency market, on average 22.8%. The number, however, fell to 18.9% in April and May. The VA share averaged 11.5% during this first period, but fell to 10.3% during these two months. While part of the drop may be due to real estate values ​​exceeding FHA loan limits, those limits increased in January 2021, while FHA and VA stocks continued to fall.

The latest available HMDA purchasing data (2019) shows that a much higher share of FHA and VA borrowers were black or Hispanic compared to conventional borrowers, in some cases a difference of more than 10 points. Additionally, 41.9% of FHA borrowers and 36.3% of VA borrowers were under 35, compared to 33.6% 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 were at the top of the list, followed by appraisal issues, a longer time to close and low down payments.

Government loans require property checks
to detect health, safety and security risks such as lead paint, failed roofs or end-of-life devices. Inspections are not required for conventional loans, and in a tight market, many buyers have chosen to forgo them or use them only for informational purposes.

When a home is valued below the agreed upon price, the FHA and VA require that the the seller must reduce the purchase price to match the appraisal and if the deal fails, the appraisal stays with the house for 120 days. With conventional financing, the parties can renegotiate the price and the buyer can make up the difference if they wish.

Government loans are Slow down shut down, often due to necessary repairs. 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 conventional loans.

Conventional loans typically require either a 20% down payment or private mortgage insurance, while government guaranteed loans allow for lower down payments, a primary reason they are used.
disproportionate by first-time, low-income and younger borrowers. The authors wonder why a low down payment would be a concern for sellers, but they can take it as an indicator of the certainty of the close.

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

The authors conclude that “reducing these barriers can help government borrowers be more on a par with conventional borrowers. This is just one of many steps that could close the racial homeownership gap and make the mortgage market fairer and more equitable for all borrowers ”.