Starting February first, the current prohibition on providing FHA backed loans for properties that have been owned by the seller for less than 90 days will be waived for a year.
To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:
∙ All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
∙ In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the waiver will only apply if the lender meets specific conditions.
∙ The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
The full language of the Waiver of Requirements is available online.
∙ HUD Takes Action to Speed Resale of Foreclosed Properties to New Owners [HUD]
It’s unclear what benefit this brings to the market, other than encouraging speculation.
Arguably, this might make it possible to sell a property that is difficult to finance (due to lack of kitchen, furnace, or some other defect) to a cash buyer, who would cure the defect and resell at a higher price.
My guess is that this scenario will not be the most common implementation of the new policy. This bears watching.
Does anybody know the rationale for this new rule?
My guess would be that the rationale is to try to prop up the housing market and produce more transactions. This will not help much of anything, despite the claim that the waiver encourages stable neighborhoods.
The reason they are doing this is so that the banks can get rid of their inventory of foreclosed houses faster.
By letting flippers buy them, it gets the foreclosed houses off the books of the banks faster. They don’t care what happens afterwards, whether or not the flippers are making money or whatnot. It would take the banks far too long to get rid of the homes themselves, so they are enlisting the flippers as middlemen, who will assume the risk for the ability to profit.
Of course, the moral issue of further rewarding those that actually caused the housing bubble won’t be addressed, much like how the banks themselves were handsomely rewarded in $150 billion in bonuses for almost ruining the financial system.
Speaking of other changes at the FHA (Foreclosed Homes Agency? Foreclosure Happens Always? Foreclosing on Homeowners across America?), apparently they are changing the initial insurance premium from 1.75% to 2.25% and are reducing the “outside assistance” (i.e. sellers pay closing costs) provision from 6% to 3%.
http://www.nytimes.com/2010/01/20/business/20home.html
These changes are a joke and don’t change the characterization of FHA loans as Bubble II. What would really be a monumental change would be to raise down payment requirements significantly.
Baby steps, baby step.
As Colonel Sanders said to Lord Helmet, “We can’t stop sir, it’s too dangerous. We have to slow down first.”
The change is completely in repsonse to the amount of inventory HUD has on hand.