Friday, Sept. 19, 2008 | Bargain prices on foreclosures have drawn a host of the region’s first-time homebuyers out into the house hunt.

The no-money-down, easy-to-get loans of the frenzied boom days are largely gone from the picture. In their absence, many buyers are turning to mortgages insured by the government for veterans and first-time buyers under Veterans Affairs and the Federal Housing Administration programs. With record numbers of houses for sale, these programs have been touted by hopeful real estate professionals and housing pundits nationwide as a partial savior for the slumping housing market.

But the hope that buyers using these loan options will dramatically help reduce the stock of houses on the market might be ill-placed. Buyers looking for a deal on a foreclosure using one of these loans are encountering a tougher situation than they expected: banks turning down offer after offer.

If banks have another offer from a buyer holding cash or even a typical loan, they are reluctant to approve offers from buyers using FHA or VA financing because the programs require sometimes significant fixes be done to the property before the sale closes, like installing new appliances in a thrashed kitchen or resurfacing a holey floor.

“You couple that with a bank that doesn’t really want to fix anything and you’ve got a situation where banks don’t want to sell to those buyers,” said Gary Kent, a real estate broker who specializes in selling bank-owned homes.

In the meantime, some buyers and their agents are getting frustrated. The issue is popping up as a point of commiseration at meetings of real estate agents.

Cindy Byrne has been house-hunting in City Heights for nine months, looking for a small, foreclosed house. She’s armed with an FHA loan, and has submitted offers on more than a dozen houses in that time. She’s been passed over every time but once, when she ended up retracting her offer because she discovered an addition to the house was unpermitted.

“My Realtor and I have coined it as a ‘bank market’ not a ‘buyers market,’ because the bank’s in control,” she said. “I don’t know why I’m being passed over. I think the fact that I’m an FHA buyer puts me in the same category as someone in an unfavorable ZIP code.”

Foreclosed properties constitute a significant piece of the housing market. In August, 43 percent of the homes that sold in San Diego County had been foreclosed on at some point in the previous year, according to MDA DataQuick.

Owners leaving foreclosed houses have been increasingly trashing the properties, stripping kitchens of sellable appliances, ripping out historic pieces to sell online. Houses left vacant for months attract vandalism. Neglected pools magnetize mosquitoes. And the sellers of those properties — real estate agents working on behalf of banks — often list them “as-is,” a representation that the buyer should be ready to fix whatever has befallen the house.

FHA and VA deals require more stringent appraisals than other forms of financing, because the government directly insures the loan. Often, the appraiser comes back to the bank with a list of repairs that are necessary before the house is inhabitable, and must go back to ensure the seller has done them before the loan can close. In the meantime, the seller and the seller’s agent have to hope the deal will still go through in the end.

The programs exist to encourage homeownership among first-time buyers and veterans. FHA loans are generated by a private bank and insured by the government, and are available to borrowers who might not qualify for conventional financing because of a borderline credit score or because of a low down payment. VA loans don’t require a down payment at all.

The renewed buzz over the FHA and VA programs comes amid a housing market desperately searching for ways to lower its stock of unsold homes. It comes up in conversations among real estate pros and sellers who are hoping to see more buyers enter the market.

But Mark Goldman, a local mortgage broker with Windsor Capital and a real estate finance professor at San Diego State University, said the aversion to selling such houses to first-time buyers might be a good thing. VA loans don’t require any down payment, and FHA loans only require a 3 percent down payment, and don’t require borrowers to show savings. Ostensibly, a buyer using such a loan has stretched to make even that 3 percent, and might not be able to write a blank check just to make the house inhabitable.

“The reality of the market is that the first-time home buyer who is really stretching their budget to the limit may not be the appropriate buyer for that property,” Goldman said. “They move in, and there’s no water heater, the A/C coils have been stolen, the toilets aren’t working. Do they have the wherewithal to get down to Home Depot and buy five-grand worth of stuff?”

Chris Muntz has been looking for a foreclosed home in North Park, Normal Heights or Golden Hill, using an FHA loan. He said his real estate agent has warned him his offer “probably won’t even be considered” when there are multiple offers. That reality deterred him from even trying on a couple of houses he was interested in, because he knew there were multiple offers. Now he’s examining the market for houses that have been listed for a long time, because he’ll be more likely to be the only offer.

He’s been house-hunting for two months. “Not too terribly long but long enough to get frustrated,” Muntz said.

Using FHA financing isn’t impossible in buying foreclosed properties, but it is requiring more persistence than some buyers expected. Still, the financing option has grown in popularity, especially with a heightened limit for how much can be borrowed. That limit was raised to $729,750 with the federal Economic Stimulus Act passed earlier this year. The limit will be lowered by about $100,000 in January 2009.

During the boom, buyers using FHA loans were nearly nonexistent, said Danny Mendez, director of processing and underwriting at the FHA Homeownership Center in Santa Ana, because the price of housing reached beyond the loan’s limits.

“The one thing about San Diego that’s interesting is that the FHA volume there got so small it was almost ridiculous,” he said.

Between October 2006 and September 2007, San Diego buyers used 1,460 FHA loans to purchase houses. In the same period this year, that number nearly doubled to 2,626, Mendez said.

Real estate analyst Bruce Norris of the Riverside-based Norris Group owns 24 houses in Riverside, Perris and Moreno Valley that are in the fix-up stage right now. He bought them from banks and is rehabbing them to sell to homebuyers. He said his group spends about $35,000 per house in fixes. A house he buys from a bank for $100,000 might relist for $175,000 or so after he’s rehabbed it.

“People think they want to buy an REO because it’s a deal,” he said. “I think most of the people that buy an REO at a discount are not prepared by the cost they find once they get there. I think it sets up the next foreclosure.”

The banks, and their representative agents, shouldn’t be blamed for their disinclination to the government programs and their preference for a cash buyer like Norris, Goldman said.

“The agent that represents the seller is charged with the responsibility to select the offer that’s most likely to close,” he said. “When there’s a great deal of concern and risk, it’s appropriate to consider that they want a sale that’s going to go through smoothly.”

Part of the aversion to FHA, separate from the VA program, may be left over from when those loans were a lot more restrictive, Mendez said. FHA has changed its rules in recent years to allow the cost of minor repairs to be rolled in to the loan so that the buyer can take care of it rather than the seller. The FHA loans are not issued by the government, but are issued by private lenders and insured by the government. A less-popular FHA loan exists that allows buyers to roll even significant repairs into their mortgage.

“I think part of that is the old way of thinking that’s going out the window,” he said of the bias against FHA borrowers. “Those guys are becoming dinosaurs quickly.”

The decision to buy a house should still be made extremely cautiously, said Erlinda Avena, CEO of the San Diego Home Loan and Education Center.

“On the one hand, this is a buyer’s market, but on the other hand, you’re plagued with the continuous influence of defaults and foreclosure impacting not just individuals but the entire neighborhoods,” she said. “You also have to be very prepared but being able to buy under the economic conditions. Are you going to have an income to support yourself and your mortgage in this topsy-turvy economy?”

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