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Don’t Believe the Hype: FHA’s Temporary Waiver of 90 Seasoning Rule

Kathleen A. Scanlon — Sun, 17 Jan 2010 17:05:18 +0000

On Friday, January 15, 2010, HUD Secretary Shaun Donovan issued a press release, as part of HUD’s Neighborhood Stabilization initiative, temporarily waiving FHA’s 90 Day Seasoning Rule. Amazingly, HUD is cognizant that the seasoning guideline is having a negative impact on alleviating the problem of abandoned and blighted homes:

“In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.”

The online real estate community was buzzing yesterday as news of this waiver spread quickly. The investor “gurus” are, of course, rejoicing and spreading the news far and wide, without a careful read of the Waiver itself. The intent of this temporary policy change is to allow investors to take title to a property, rehab it and sell it quickly. It is not a panacea for those investors who pick up a property at a discount, seeking to flip it for a profit in a “back to back” or “double” closing. For those types of transactions, the 90 day seasoning rule is a non-issue if you utilize a land trust correctly.

HUD’s Mortgagee Letter 2006-14 clarified the Rule and Regulations set forth in 24 CFR 203.37a concerning the eligibility of properties for FHA insurance and the rules governing sales of property. As I have discussed in a previous blog post, Legal Analysis of FHA’s Seasoning Requirements, the real estate and mortgage industry routinely misunderstands and applies these eligibility rules incorrectly and it appears that the trend is continuing with this new Waiver.

FAQS:

1. Does it have to be a property acquired through a short sale, bank auction or an REO to be eligible under the Waiver?

No. There are no requirements in the Waiver concerning the status of the property itself. It is not necessary to demonstrate the distressed nature of the property.

2. So I can get a property under contract, execute a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I purchase the property?

No this transaction would not be eligible for FHA insurance. The waiver is actually of the requirement that the real estate contract be executed on the 91st day after the investor takes title to the property. The requirement that the investor own the property is still in effect and therefore Contract Vendees and Assignments of contract are still prohibited. Further, an application for an FHA mortgage cannot be submitted to a Lender for consideration without a fully executed Contract. Therefore, Back to Back Closings will be impossible.

3. So I can close a week after I take title?

Virtually impossible for several reasons. I venture that there are almost no Lenders in this post-bubble market that will take an application for an FHA mortgage and be in a position to close a week later. I am going to stretch that to probably 30 days. This is definite if your sale price to your FHA buyer is 20% or more higher than your acquisition price (do the math – its not that hard to hit that number – especially in certain areas of the country where housing prices are below $50,000). If the sale price exceeds the 20% threshhold, the investor will have to document the increase in value with supporting documentation and/or a second appraisal and the Lender will have to obtain a Property Inspection Report (see paragraph 2 of the Waiver). This report will not be ordered prior to application submittal and as discussed previously, that doesn’t take place until there is a fully executed Contract of Sale.

4. I found this great property that my buddy picked up 2 months ago for $120,000.00. He rehabbed it and I am in contract to purchase it from him for $220,000. I want to flip it to an FHA buyer for $250,000.00 can I do it?

You will have to wait until the 91st day after you close title to enter into a Contract of Sale with the FHA buyer. The Waiver will not apply if there is a history of prior flipping activity in the 12 month chain of title (see paragraph 1(c) of the Waiver).

5. In April, the Treasury’s Short Sale Program goes into effect and there should be a lot of distressed properties coming on to the market. The Waiver is going to be a big help in moving those properties!

No, it isn’t. Apparently, government offices do not communicate with each other before issuing rulings – one of the requirements under the Treasury short sale program is that the Contract include a representation that the Purchaser will hold the property for 90 days post-closing. Perhaps the Treasury will revise its Directive and remove this offending language (which, as I had discussed previously, is extremely short-sighted).

Conclusion

Investors should rejoice as finally they are receiving the recognition they deserve: properties are moving because of their hard work and without the proper incentive, it wouldn’t happen. Instead of being the black sheep of the real estate community, investors are a major part of the solution. This Waiver is what investors need to get the properties rehabbed, sold and occupied to ameliorate the problem of abandoned and blighted homes. It is not a license to flip and should you wish to engage in that type of activity, you will not be able to use this Waiver to accomplish your goals.

Are you an idiot to keep paying your mortgage?

Kathleen Scanlon — Mon, 17 Nov 2008 16:37:20 +0000

Kathleen Pender Sunday, November 16, 2008

Should you keep paying your mortgage?

If you have significant equity in your home, absolutely. Are you an idiot to keep paying your mortgage? If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.

Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent. Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

But what about the moral obligation to pay off a debt?

Elected officials have been chipping away at that by blaming the foreclosure crisis largely on predatory lenders. In a campaign fact sheet, President-elect Barack Obama says he “recognizes that the real victims in the subprime mortgage crisis are not the lenders, but the millions of borrowers who followed the rules and whose only crime was taking out mortgages that lenders told them they could afford.”

Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale) or gets a loan modification that reduces the principal balance. The tax waiver originally applied only to debt on a primary residence canceled in 2007, 2008 or 2009. Last month, in the bailout bill, Congress extended the waiver until 2013. There are exceptions: The waiver applies only to debt that was used to buy or improve a primary residence. If you took out a home-equity loan or did a cash-out refinance to buy a car, you’ll still owe tax on that debt if it is canceled. For state income taxes, California has partially conformed to the federal law, but only for debt canceled in 2007 or 2008. (For more details, see my April 24 column at www.sfgate.com/ZFJS.)

The Federal Housing Administration is offering two programs to help homeowners get more-affordable mortgages, FHA Secure and Help for Homeowners. Neither requires borrowers to be current on their payments.The program announced Monday goes a step further by requiring homeowners to be late. The Streamlined Modification Program, sponsored by the government agency that oversees Fannie Mae, Freddie Mac and 27 loan servicers, promises to swiftly reduce payments for certain homeowners who appear to be on the verge of foreclosure. How to qualifyTo qualify, you must be at least 90 days delinquent and live in the home as your primary residence. You must owe at least 90 percent of the home’s value. It’s fine if you owe more than it’s worth. Your mortgage must be owned or guaranteed by Fannie Mae and Freddie Mac or held by one of the participating loan companies .If you meet these requirements and can document your income, your servicer will reduce your monthly mortgage payment – including property taxes, insurance and association dues – to 38 percent of your gross income.The reduction can be accomplished in one or more ways:– Reducing the interest rate, but not below 3 percent. (The new rate, if below market, goes back to a market rate after five years.)– Extending the term of the loan up to 40 years.– Reducing the principal on which monthly payments are calculated. Unpaid principal is added to the loan balance and due when the homeowner sells or refinances. The reduced interest payments never have to be repaid.

If you owe more than the home is worth, the plan will only reduce principal down to 100 percent of market value, according to an official for the Federal Housing Finance Agency, which supervises Fannie Mae and Freddie Mac.If all three of these maneuvers can’t reduce your payments to 38 percent of income, you won’t get a fast-track modification but could still request a customized deal, says the official, who spoke on the condition of anonymity. The streamlined process looks only at income, not assets. If you refinanced your home to buy a Mercedes or own another home, you won’t be expected to sell them to pay your mortgage. Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again. “This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford. “The government is offering loan servicers $800 for every homeowner they get into the plan. Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan. “To prevent fraud, the government says a borrower “must certify that he or she experienced a hardship or change in financial circumstances, and did not purposely default to obtain a modification.

“The housing agency official doubts that people will stop paying just to get a modification because it will hurt their credit record, and that will make it harder to get a loan and possibly a job.” Credit bureau reports are checked by employers. They’re taking a big risk missing three payments just to get a lower rate,” she says. An existing lender who sees your credit score deteriorate could also cut back on your credit and possibly raise your rate.

Credit score impact

Risking your credit score for a lower rate “sounds like a game of chicken on the lending highway,” says Craig Watts, a spokesman for Fair Isaac, which markets the FICO credit score.A 90-day delinquency will hurt your score, but not as badly as a foreclosure. How many points it takes off depends on other things in your credit file, such as the number and severity of late payments on other accounts.In the latest version of FICO, which is just being rolled out, “one isolated delinquency will do less damage to your score than it has in the past,” Watts says. Consumers who suffer a severe delinquency can rebuild their scores over time by paying all credit accounts on time and keeping their balances low.

”If it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender, I’d be for keeping the home,” Watts says. “Your score will bounce back.”Schiff predicts that many homeowners will reach that conclusion and that the new program will cost Fannie and Freddie far more than expected. Although the mortgage giants are under a government conservatorship, the housing agency official says that any losses under the program will not be paid for by taxpayers unless Fannie and Freddie exhaust their reserves.

Are you an idiot to keep paying your mortgage?

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Tags: loanmodification, FHA, subprime, mortgage, equity, real estate, Fannie Mae, Freddie Mac

Fannie and Freddie – What Went Wrong and Can It Be Fixed?

Kathleen Scanlon — Thu, 24 Jul 2008 02:32:54 +0000

July 22, 2008 – CMPS Institute

“There are two main issues that need to be addressed regarding the problems being experienced by Fannie Mae and Freddie Mac,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that certifies mortgage bankers and brokers.

Issue #1 – Short-term crisisFannie and Freddie currently purchase a whopping 68% of all new US home mortgages compared to 45% one year ago. This means that if they fail, nearly 70% of US home buyers would be unable to qualify for financing. “The declines in home prices we are currently experiencing would pale in comparison to the rapid free-fall in home values that would result if 68% of home buyers suddenly found themselves without funding options,” said Nicholas.The carnage in the real estate markets wouldn’t be the only crisis facing consumers. Wall Street investors, financial institutions, mutual funds, foreign governments and wealthy foreign investors have long considered their investments in Fannie Mae and Freddie Mac to be super-safe. The turmoil currently being faced has totally hammered the asset values of Fannie and Freddie and put downward pressure on both their bond and stock prices.“Accounting rules require financial institutions to reassess the value of their investments based on current market prices,” said Nicholas. “Every time asset prices fall, financial institutions need to raise more money to maintain their minimum capital requirements.” The downturn in Fannie and Freddie stock and bond prices has the potential to cause upheaval in financial markets across the world. “This pressure to raise funds and meet capital requirements creates a downward spiral in prices forcing financial institutions to continually sell even more assets into an already depressed market,” said Nicholas. “A bad situation quickly becomes even worse – this is exactly what has been happening among financial institutions since the credit crisis began in July 2007.

”Issue #2 – Long-term policyFannie Mae was created in 1938 as a government agency with a mission to buy mortgages from banks and issue bonds on the bond market using the pool of mortgages as collateral for the bonds. This process was designed to add liquidity to the mortgage marketplace and supply banks with extra funds that could be used to allow more Americans to buy and own homes. Fannie Mae became so successful and profitable that in 1968, the government decided to spin it off into a private, shareholder-owned company. In 1970, the government chartered Freddie Mac as another private, shareholder-owned company to provide some competition to Fannie Mae and further add liquidity, stability and affordability to the housing market. Since then, the companies have grown so large that they own or guarantee roughly half of all mortgages in the United States.The main issue being faced by government officials today is whether it is wise or viable to have US taxpayers support the risky business practices of for-profit companies like Fannie Mae and Freddie Mac. Interestingly enough, Fannie and Freddie do not wish to be completely privatized. They have spent over $170mm on government lobbying activities since 1998. “Their preferred status and insider ties to the government have resulted in record corporate profits when times were good and a taxpayer-funded safety net when times are bad,” said Nicholas. “Just because the companies engage in a business that benefits the public, doesn’t mean that they deserve to be fully backed by taxpayers and the federal government.

”Nicholas and the CMPS Institute are among the growing number of individuals and institutions that have called for completely privatizing Fannie and Freddie and eliminating their ties to the government. “Breaking up the companies and completely privatizing them may very well be a viable long-term solution that could prevent a crisis of this magnitude from occurring in the future,” Nicholas said. “The delicate balance here is not to sow the seeds of next crisis while simultaneously preventing a full-scale meltdown of the US housing market and financial system.”Members of the press can learn more about Fannie Mae, Freddie Mac and other current events in the mortgage industry by attending the upcoming CMPS event in New York City, July 28-30, 2008. The main presenter will be CMPS Institute Chairman Gibran Nicholas, and there will be a special real estate market forecast delivered by Dr. Lawrence Yun, chief economist of the National Association of Realtors. The entire event is open to the press, who can request complimentary attendance by registering here: http://www.cmpsinstitute.org/public/forecastAbout CMPS Institute: CMPS is a training, examination, certification and ongoing membership program for financial professionals who provide mortgage and real estate equity advice. Recognized for its preeminence within the industry, the CMPS curriculum represents the core knowledge expected of residential mortgage advisors regardless of the diversity of specializations within the industry. Over 5,500 financial professionals have gone through the program since its launch in 2005. For more information or to find a certified professional near you, please visit www.CMPSInstitute.org or call 888.608.9800.CMPS Institute by Josephine Nicholas, Ann Arbor-MI

Fannie and Freddie – What Went Wrong and Can It Be Fixed?

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Tags: FannieMae, Freddie Mac, lending, mortgage, crisis, foreclosure, real estate