HOUSING: Banks could stymie San Diego County rescue plans

Lenders said to avoid FHA loans in favor of lower, all-cash offers on foreclosures

By ZACH FOX - Staff Writer | Monday, November 24, 2008 9:07 PM PST ∞

Banks have spurned potential home buyers who rely on government-backed loans in favor of less money for all-cash offers ---- a development that might disrupt county and local plans to heal a foreclosure crisis, analysts say.

As part of a $4 billion housing bailout by Congress, San Diego County received $5 million to address the foreclosure crisis locally and has used most of the money to expand first-time home buyer programs that encourage people to buy foreclosed homes. Officials at several North County cities plan to request state funds to do likewise.

But analysts said the plans will do little to nothing to help a foreclosure crisis that has sent 8,000 North County houses back to the banks since 2007:

-- Banks might not agree to sell foreclosures to borrowers with county-backed loans because federal legislation requires the money be given only on purchases discounted 5 percent.

-- Banks have shown a preference for all-cash offers. While not many buyers have a pile of cash to buy a home, investors have been actively buying low-priced houses in the heaviest foreclosure areas.

-- Helping buyers purchase foreclosures does nothing to prevent foreclosure.

-- The programs are too small in scale.

The combined loaning power of the city of San Diego, the county and the city of Chula Vista would provide for less than 200 units. "On any given day, there's 6,000 foreclosures out there," said Jim Bliesner, director of the county Reinvestment Task Force, a quasi-government agency.

To the north, Riverside County received a larger chunk of federal aid, $48.5 million, to address its foreclosure crisis. With more money, the county has sketched different plans.

Besides making loans for first-time home buyers, the county plans to buy $20 million worth of foreclosures directly from banks, said Tom Freeman, spokesman for the county's housing program. Some of that money could go to Lake Elsinore and Winchester, two communities that scored among the highest in the county's risk assessment, based on foreclosures and price declines.

Still, even if the county bought each house for $200,000, below the county median of $230,000, the program could absorb only 100 houses in a region with thousands of foreclosures.

The huge volume of foreclosures has sent governments scrambling to stabilize home prices by aiding first-time home buyers with government-backed loans, often backed by the Federal Housing Administration, or FHA. But banks, which decide who gets to buy their foreclosures, aren't playing ball ---- at least not yet.

FHA loans have a bevy of conditions, including fixing broken windows and eradicating termite infestations, that can delay a sale or cause an offer to fall through. Instead of waiting weeks or months for such a loan to close and paying for maintenance, banks would rather take less money on a cash offer that rids them of the cash-sucking properties immediately, mortgage brokers said.

Further, the government programs require banks to take less money, another disincentive compared to cash offers.

To speed the process, banks have slashed prices on foreclosures and elicited bidding wars across the region. That attracted all-cash investors looking to rent out the properties or flip them for a profit, and left buyers who rely on the government loans frustrated.

"I feel like we just haven't been given the opportunity to compete," said Christin McLaughlin, a first-time home buyer looking in the Rancho Bernardo area. "If we could compete, we wouldn't have a problem. But with a FHA loan, we're at a disadvantage."

Still, government officials said they are hopeful the new programs will help get buyers into houses, increasing demand and stabilizing the market.

At the county level, which will help buyers in unincorporated areas such as Valley Center and Ramona, officials will not receive the home buyer funds until next spring.

By that point, banks might be more willing to accept FHA-backed offers, said Catherine Lichterman, director of the county's housing program.

"It could be the credit markets are much more open and amenable to lending ---- that's what our hope is," Lichterman said. "There's so much uncertainty that it's difficult to say at this point how challenging this will be for a limited number of households to get into a homeownership situation."

But even if the government programs failed to make an impact, signs of recovery have started to pop up in pockets of North County real estate.

Low prices have attracted buyers, quadrupling the number of sales from a year ago in certain areas.

Contrary to reports a year ago of foreclosures priced too high and languishing on the market for months, real estate agents said lenders have recently cut prices, attracting a slew of interested buyers. And banks, which consider foreclosures an encumbrance, have shown a preference for the all-cash offers, even if they are at a lower price.

Lyle Anderson, a Poway-based real estate agent, said one of his foreclosure listings sold to an all-cash buyer for $80,000 less than a buyer with a loan.

"If you needed to sell your house yesterday, you're going to take that all-cash offer and leave money on the table," Anderson said.

Contact staff writer Zach Fox at (760) 740-5412 or zfox@nctimes.com. Read his blog, "On the Realside," at bizblogs.nctimes.com.