Pretend you’re a bank owner who was just served a stack of 400+ mortgage compliance guidelines, rules, and regulations.
Now, remember, you make money based on how big the loan is. Forget interest- the bigger the loan, the more profitable you will be. And for the loan officer working at your bank, the higher the loan the bigger their commission check.
Realistically ask yourself: are you going to piss around with some small-time homebuyer who is trying to buy a house for under $100,000? Really.
Last week, Yuliya Panfil and Craig J. Richardson wrote a guest essay for the New York Times titled, “How We Unintentionally Created the Affordable Housing Crisis.” In it, they laid out a new and unique perspective that I can’t help but share here.
Here’s their argument:
The Dodd-Frank Act, which was intended to protect Americans, has had the unintended consequence of pushing low-cost housing out of the hands of regular homebuyers and instead, into the hands of investors.
How could this be?
As a refresher, the Dodd-Frank Act was enacted after the financial crisis of 2008. It was created to prevent the excessive risk-taking of banks and to protect the consumer. It includes hundreds of rules and guidelines that banks and homebuyers must comply with before lending for a mortgage.
Even though large institutional banks were the primary players causing issues in excessive risk-taking, all banks had to follow the new rules and regulations.
What really sucks about this is that it has hurt lower-income homebuyers and the small banks, who have historically served them. Ultimately, the Dodd-Frank Act dis-incentivized banks from lending for small mortgages.
Since the passage of the Dodd-Frank Act, the article claims small-mortgage lending has fallen by 70%.
Banks, loans, and homes in disrepair
But things get even more complicated.
Cheap homes are often in need of repair. Buying a home in need of repair used to give a homeowner a huge leg up. That’s because homes that are already repaired (or are newer) are baking those costs into their asking price– in addition to profit for the investor or developer.
If a homeowner could just buy a house that was hum-drum, older, a bit dated, and in need of minor repair, they’d save a lot of money compared to buying a new or flipped home. And they could re-do things over time, exactly how they wanted!
But suddenly, finding homes like this became next-to impossible. There are many reasons why. Let’s explore some of them:
- Realtors realized that homes that were updated and staged brought way higher commissions. They started recommending that homeowners complete a long list of tasks in order to sell their home (instead of just selling it in the condition the Realtor saw it in).
- Homeowners didn’t always weigh the pros and cons of this advice and often followed it regardless of the headaches or costs involved. (It isn’t always worth it to do all that work. Oftentimes, the price difference is a wash in the end.)
- HGTV and Realtors led many sellers to believe that regular homebuyers would never purchase a home that was dated or in need of maintenance.
- HGTV and the cult following of design-celebs like Joanna Gaines made flipping look easy. This increased demand for cheaper homes in need of repair. Especially if the homes were in great condition but were cosmetically “dated”. Homeowners began to “flip” their own homes before putting them on the market.
- As discussed, bankers were dis-incentivized from loaning traditional mortgages for lower-cost homes and homes in need of repair.
- During the many years of low interest rates, investors were incentivized to buy cheap homes and use them as rentals, Airbnbs, and flips. They often did this using commercial or construction loans rather than traditional mortgages. (Strangely, commercial loans were often easier to get with less hoops to jump through than traditional mortgages.)
- Insurers began requiring homes be “fixed” before closing
Insurance requirements upon closing
I am not sure when insurance companies began requiring repairs to be completed before closing, or if this is an issue that differs from state-to-state. I tried doing some research about this and I haven’t found much.
It used to be that you could insure your home with a low-coverage “catastrophic” plan to protect only your initial investment in the event of a total loss. To me, this makes sense and every homeowner should have the option to choose a policy like this if they are buying a home in disrepair. It is a better alternative to an insurer deciding that they will not insure you, thus screwing up your purchase and closing.
Additionally, putting repair money in escrow and negotiating repairs with the old homeowner is asking for complications. I wouldn’t advise it.
One way around this, albeit a riskier option, is to buy the home using a construction loan and converting it to a traditional mortgage after repairs have been made.
Permits, permits, permits
Permits are another contributing factor to our affordability crisis.
Every dollar an investor, developer, or flipper pays, they will absolutely positively pass those costs onto whomever is purchasing the house.
Profitability dictates everything. If builders cannot make money building homes, why would they bother?
Not only are permit costs out of control, there’s a new type of fee in town too- impact fees. Impact fees are often in addition to your standard building permit fees. George Sheetz fought California’s impact fees and won. We can hope this is the beginning of a shift from out-of-control costs paid to cities just to allow you the opportunity to build something on your own property.
Rent and developer/investor profitability
Because homes are so expensive to build and fix now, in order to see a return on investment, investors must hold onto homes longer than in the past. Over the last four years especially, it is difficult to make the numbers work for a simple flip or new-build. This translates to more built-to-rent homes, flipped-to-rent homes, long-term rental investments, and triplexes. This could contribute to housing-stock woes even further.
The fact of the matter is this: Wall Street and Big Money will always find its ways around regulation. Always. So perhaps maybe we should consider how regulations will negatively impact lower-income people and small businesses.
Why should their regulations be the same anyway?
Thanks for reading,
HouseRat Zero