I was literally stunned today when I learned that HUD and many of the largest sevicing lenders have partnered to expand the government's "First Look" program through the Neighborhood Stabilization Programs (NSPs) in place around the country. These programs are exactly the wrong prescription at precisely the wrong time. The First Look program and NSPs are certainly not new, they further erode housing stability, and prescribe a shot of tequila after a night of binge drinking.
The First look program came into being around the beginning of 2010, and was a result of home buyers not being able to compete with investors in the open market. Back in the spring, there were very few homes on the market for sale in Arizona, and the Home Buyer Tax Credit was pumping along, building buyer demand. The problem was, every time a home came onto the market, a cash investor would offer over the asking price, and financed home purchasers simply could not compete. Because of appraisal restrictions, financed buyers cannot pay more for a home than it will appraise for. Cash buyers can pay whatever they want. This worked great for lenders and investors. The lenders got more than the property was even worth, and investors got rental properties to put back on the market. (It is worth noting here that many families are experiencing foreclosure, and cannot find a rental home on their markets. The market needs more rentals.)
Housing advocacy groups denounced this investor glut as a travesty of social justice that needed to be stopped, so that more homeowners could buy homes (with borrowed money and more "sub-prime," low down payment loans, by the way. Sound familiar?). Government responded with the First Look program. The program was deceptively simple: only owner-occupied purchasers would be allowed to make offers on properties within the first 15 days of being on the open market. This would presumably ensure that homeowners got "first dibs" on properties for sale. In reality, the program had limited effect, as it was shortly thereafter that banks glutted the market with more homes, making the point kinda moot.
NSPs came into being to help foreclosure blight. An NSP is simply a local, county, or state community housing authority that has been given millions of dollars in tax-payer money from the Feds to buy foreclosed homes. What will they do with these homes? They can fix them up and resell them, or they can turn them into section 8 housing. You don't really need to use your imagination to figure out which will actually happen. Even before this introduction of a strong and prominent role for NSPs, the "unintended?" consequences have already ensued.
The combination of the First Look program with the NSPs has produced the glaring problem of government nepotism. See, now when a property comes to market, the NSPs are automatically notified of the property, and are given the right to purchase the property before anyone else. Please note that when I say "before anyone else," I am NOT talking about other investors. I'm actually talking about homeowners. The reality of the program is this: if an NSP wants the property, it gets the property, no questions asked.
Allow me to provide an example: A property comes onto the market. It is a nice home at a great price, and people want it. So, let's say that 5 potential buyers (these are owner-occupants) arrive with offers on the property. The lender begins to negotiate the price as high as they can get, and let us suggest that a particular buyer is willing to pay $120,000 for this home. Done deal, right? Not so fast. An NSP has also noticed the home, and would like to purchase it for their rental program. So the NSP puts in an offer of $90,000. What happens next is simply stunning: all potential private purchasers are kicked to the curb, and the home is sold to the NSP at the reduced price. In fact, NSPs are mandated to be able to purchase these homes for 1% less than market value.
The combination of these two programs is deadly stuff to the housing maket. The anti-competition that these programs engender, along with the sizeable expansion of Section 8 housing is NOT was this market needs.
Allen
