Bailout

Why you can?t buy a unique house

By Felix Salmon

It’s hard to sell a circular house: over the past year, the palindrome-friendly realtors at Weichert have tried and failed to move 300 Farmington Road at $524,425; $499,994; and most recently $449,944. But it’s still on the market, and the banks are to blame. Mae Ngai and John New wanted the house, had the 20% down-payment ready, and were pre-qualified for a loan. But it wasn’t enough for the lenders:

Two mortgage companies turned us down. The first did so after its investors – big banks with household names – rejected our application. The second mortgage company’s internal underwriters also rejected us. Their reasons were the same: The home, a customized modular house of internationally acclaimed design, built in 1989, is . . . round.

Being “unusual” or “unique,” it was deemed “not marketable.” Despite its evident worth and multiple independent appraisals, the lenders said they could not assign a value to the house because there were no comparable properties. And, with no “value,” there was insufficient collateral for a loan.

Ngai and New say, reasonably enough, that “there is a certain perversity about making a house unbuyable, even to two eager would-be purchasers, for fear of it being unsellable in the future”.

More generally, this shows a mortgage system broken in all manner of different ways.

For one thing, everybody is far too rule-bound, still. If a lender is worried about the difficulties involved in selling a round house, then it should be able to ask for a higher downpayment, or require a slightly higher mortgage rate, to make up for the extra risk. But no one seems set up to be able to do that.

What’s more, unique houses have an upside as well as a downside, from the point of view of a big lender: they’re less correlated to the market as a whole. If you’re trying to sell a standard suburban tract home which is to all intents and purposes identical to the 152 other suburban tract homes on the market, you’re in trouble. The nightmare for a mortgage lender is a property-market crash with prices plunging and far more properties coming onto the market than there are qualified buyers for them.

The other nightmare for mortgage lenders, of course, is the idea that homeowners might simply walk away from their underwater property, often because it makes perfect rational sense to do so when you can rent something identical or better for less money than you’re paying on your mortgage.

Unique homes, by contrast, are the kind of things which can prompt bidding wars in the midst of a property crunch — they’re not nearly as susceptible to the whims of the broader market. And when they’re sold, they’re nearly always sold to people who love them and have a strong emotional connection to them, which makes their owners less likely to walk away from their mortgage.

If I were a big bank with a large mortgage portfolio, then, I’d love to add a few unique houses to the mix: they would help a lot on the diversification front. But that would involve giving individual bankers more discretion, and trusting them to be good at their jobs. So instead the banks just say no. And the owners of 300 Farmington Road, I guess, are just going to have to wait for a cash buyer to come along. Or be willing to finance any purchase themselves.

Full post as published by Macroprudential on November 08, 2010 (boomark / email).