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June 16, 2008
In an attempt to help lenders speed the process of getting real estate-owned properties off their books, the Federal Housing Administration will temporarily lift a 90-day waiting period for property resales financed by FHA-guaranteed loans.
The 90-day waiting period — instituted in 2003 to counter predatory lending and house flipping — never applied to properties sold by Fannie Mae®, Freddie Mac®, or state and federally-chartered financial institutions.
But it can be hard to determine which lenders are exempt from the rule, and many who are exempt prefer to transfer title to REO properties over to property disposition firms that are not exempt, FHA officials say. Because a glut of foreclosed and abandoned homes harms neighborhoods and delays a community's recovery, FHA will lift the waiting period for one year.
"The action we take today will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes in neighborhoods across the country," said Federal Housing Commissioner Brian Montgomery in a statement announcing the change.
But because FHA also requires homes to be purchased with loans that it guarantees to be in "safe, secure and sound" condition, lenders still won't be able to resell many of the homes they've foreclosed on to FHA-eligible buyers until they make the repairs needed to bring them up to FHA standards.
"It's not going to have as much of an impact as one would assume, because most of the properties aren't going to meet FHA standards," said Glen Daniels, director of real estate-owned properties for the distressed and foreclosed property listings site, foreclosure.com.
Daniels, who once managed $243 million in REO properties for Ocwen Financial Corp., said that if the previous owner of the house was unable to make the mortgage payments, the chances are good that he or she was not keeping up with maintenance.
Lifting the 90-day waiting period does give lenders more incentive to repair REO properties, Daniels said. Under the old standard, lenders that chose to renovate a property would still have to wait 90 days to sell to a buyer using FHA loan guarantee programs.
With FHA loan programs accounting for a growing share of mortgage lending, "I assume a lot more lenders will take that option, to rehabilitate a property, bring it into FHA compliance, and sell to a homebuyer who is eligible for an FHA-backed loan," Daniels said.
According to the Census bureau, there were 129 million housing units in the United States, and 18.6 million were vacant during the first quarter. Those vacancies include 4.1 million rentals, 2.3 million for-sale homes, and 7.5 million "vacant for a variety of other reasons," including foreclosure.
While Daniels doesn't see FHA's new policy having a big impact in the short run, it might help stabilize property values in the long run. That's because if lenders choose to rehab properties before selling them, they won't discount their asking price as much.
In justifying its waiver of the 90-day waiting period, FHA said it would reduce the impact foreclosures can have on the value of adjoining and nearby properties.
When the FHA announced the 90-day waiting period in May 2003, the group said the most egregious examples of predatory lending were often seen on "quick flips" in which homes, sometimes, resold within a few days.
The rule, "FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs," also requires lenders to obtain a second appraisal on properties resold within 91 and 180 days if the resale price exceeds the previous sale price by 100% or more (see letter to lenders).
FHA officials say the threshold was set relatively high to allow legitimate rehabilitation efforts while deterring unscrupulous sellers, lenders and appraisers from defrauding homebuyers.
But one veteran property rehabber told Inman News that convincing the FHA that a property wasn't an illegal flip after the 90-day waiting period expired could be "a nightmare".
"We would take a shell and turn it into a castle," said Duane LeGate, president of HBN Interactive. "Half of the potential buyers couldn't qualify for my properties because of the rule. Even when the 90 days expired, you had to show FHA before-and-after pictures, full documentation of all work done to prove that the property wasn't an illegal flip."
Today, LeGate is focused on building Internet sites like houses.net, an MLS-based service for pre-foreclosure and distressed properties.
Source: Inman News, 2008