Active Rain April 17, 2010

Sell REOs Only to Owner Occupants the First 2 Weeks

I sold my first HUD home in the 90’s sometime. A HUD home, if you don’t already know, is a government-owned foreclosure that is administered by the department of Housing and Urban Development (HUD). There is a little bit of red tape involved in a HUD transaction, but they typically go well.  One rule HUD has on their homes is that they cannot be bid on by a non-owner occupant the first two weeks they are available. In other words, only owner occupants get the first shot at a HUD home for 2 weeks. If the owner occupants don’t bite, investors are allowed to bid. It works, and it fosters ownership among people that might not otherwise afford a home, or would get elbowed out by institutional professionals. 

Of course, the government can’t mandate what private enterprise can do. However, it would be good if the industry adopted this policy themselves. I have seen too many REOs slip through the fingers of qualified, perfectly good buyers and into the hands of cash investors to think otherwise. The investors then do a McRehab, resell the place at an inflated price, and the pattern continues, with affordable housing out of reach for qualified people.

As an aside, isn’t it ironic that a lender would prefer to sell to a cash buyer only? Isn’t that, from a “big picture” point of view, antithetical? If everyone paid cash, lenders would go out of business. I had Wells Fargo-approved buyers with a full price offer get rejected by a bank this week on a Well Fargo owned property because Wells wants CASH, not a 203k. Absurd and short sighted.

Banks should want owner occupants who qualify to buy their REOs for many reasons, but not the least of which is that these people will give those banks business. Moroever, it is good for neighborhoods to have owner occupants who can afford where they live. We should all want affordable home ownership supprted emphatically by lenders, not just where it is their last resort on their REOs. Too many qualified people have gotten rejected repeatedly and then discouraged from buying at a time in history when they are ready willing and able. Instead of them being comfortably in their own home with a $300,000 mortgage, some new slob is snookered into a $400,000 loan by the investor at resale and we now have another “at risk” property leveraged to the gills.

That is not a solution.

There is something wrong when the system favors cash investors to the exclusion of qualified owner occupants. It is like a Catholic telling me they don’t want to sell to another Catholic. Illogical, short-sighted, and yes, hypocritical. It will never happen and is not a “free market” solution, especially coming from a free-market oriented guy, but I can dream.