“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 bought through a small 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, do a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I buy the property?

No this transaction would not be eligible for FHA insurance. The waiver is really 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 nearly 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 certain 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 fantastic property that my buddy picked up 2 months ago for $120,000.00.  He rehabbed it and I am in contract to buy 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 Small 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 huge 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 small 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 small-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.

Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. Seasoning and FHA’s Time Restrictions on Resales – a Legal Analysis
3. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock

Evidently the government is serious about getting these delinquent mortgages modified – here is another positive change to HAMP:

Press Release from HUD:

WASHINGTON – U.S. Department of Housing and Urban Development Secretary
Shaun Donovan today announced the Federal Housing Administration (FHA)
has implemented changes to its loan modification program to ensure
consistency with the Obama Administration's Home Affordable Modification Program. By August 15th,
FHA borrowers will be able to significantly reduce their monthly
mortgage payments by seeking a loan modification through their current
mortgage company or loan servicer under the new FHA-Home Affordable
Modification Program (FHA-HAMP).

"Today, we're bringing another vital tool to the table to help
struggling families who are desperate to keep their homes," said
Donovan. "Tens of thousands of FHA borrowers will now be able to modify
their mortgages in the same manner as so many others who are taking
advantage of the Administration''s Making Home Affordable program. This
is just the latest tool we are providing to help homeowners prevent
foreclosures through the Making Home Affordable program. Earlier this
month we announced an expansion of the Home Affordable Refinance
Program to borrowers who are up to 125 percent underwater. Together,
these actions will significantly increase the help available to
homeowners.

"The Helping Families Save Their Homes Act of 2009, signed into law on
May 20, allows FHA to give qualified FHA-insured borrowers the
opportunity to reduce their monthly mortgage payment by modifying the
mortgage through FHA-HAMP. FHA released the program's implementation
guidelines today. FHA expects all servicers to implement the changes by
August 15. The program permanently reduces a family's monthly mortgage
payment through the use of a partial claim, which defers the repayment
of mortgage principal through an interest-free subordinate mortgage
that is not due until the first mortgage is paid off.

FHA has used the partial claim option in the past, which allows a
lender to advance funds on behalf of a borrower, to reinstate a
delinquent loan that was up to 12 months delinquent. Now, this program
will allow HUD to bring the borrower's payment down to an affordable
level. This will be accomplished by bringing the mortgage current,
buying down the loan by up to 30 percent of the unpaid principal
balance and deferring these amounts in a partial claim.

FHA will pay an incentive to loan servicers for each FHA loan modified
under this program. A Mortgagee Letter, along with detailed
requirements for the FHA-Home Affordable Modification Program, was
distributed to all FHA lenders today. The implementation of this
program will further the Obama Administration's efforts to stabilize
the housing market by helping homeowners to stay current on their
mortgages and stay in their homes, therefore preventing the destructive
impact of foreclosures on families and communities.

Making Home Affordable, a comprehensive plot to stabilize the U.S.
housing market, was first announced by the Obama Administration on
February 18. More than 200,000 trial loan modifications are already
underway, tens of thousands of refinancings have closed, and
informational mailings about the program have been sent to more than
one million borrowers who may be eligible.

FHA borrowers who are experiencing difficulty making their mortgage
payments should contact their loan servicer or HUD's National Servicing
Center at (888) 297-8685 to determine if they qualify for the FHA-Home
Affordable Modification Program. The Mortgagee Letter, with detailed
information about the program, is available on the HUD website. Non-FHA
borrowers can find information about the Obama Administration's Making
Home Affordable program at www.makinghomeaffordable.gov.

HUD News Release 09-137

Related posts:

1. Treasury Department’s “Making Home Affordable” Program Attempts to Tackle 2nd Lien Dilemna
2. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry
3. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock

HISTORY
To know seasoning, it is essential to examine the events that caused FHA to make this underwriting requirement.

Real estate speculators would often locate distressed real estate, buy the property at a substantial discount, make repairs and improvements and quickly resell the improved property at a substantial profit. There is nothing inherently incorrect or illegal about this model of flipping real estate and often, it led to revitalization of run-down neighborhoods and increased neighboring property values. Some speculators would do a Contract to buy a distressed property and turn around and assign the right to buy the Contract to another buyer for a price and at closing, would receive their profit without any investment at all. Again, nothing inherently incorrect with the Assignment or Contract Vendee flip model either.

The problem was in a number of these transactions, the speculator would collaborate with the appraiser, the loan officer and sometimes the end buyer to artificially inflate the value of the home or to falsify the borrower’s documentation so that they would qualify for a mortgage.  These types of fraud transactions had a high rate of mortgage defaults because it was either never the intent of the buyer to pay the mortgage or the buyer was tricked into taking out a loan he could not afford. The Lender would foreclose and find that the value of the real property was woefully inadequate.

Therefore, to curb the fraudulent activity that often went hand in hand with flip transactions, FHA instituted a title seasoning underwriting requirement for those seeking FHA financing.

ANALYSIS
FHA’s title seasoning underwriting guidelines are codified in 24 CFR 203.37a and further clarified in its Mortgagee Letter 2006-14.

FHA starts it’s discussion of the Property Flipping Prohibition by defining property flipping as ”

practice whereby
property is resold a small period of time after it is bought by the Seller
for a considerable profit with an artificially inflated value, often abetted by
a lender’s collusion with an appraiser”. This practice is addressed by FHA with a two-prong rule: (1) only Owners of Record may sell the property and (2) prohibits resales of property 90 days or less from the last sale. (Note, there is a rule for resales that occur between 91 and 180 days as well as up to 12 months but I am not going to discuss that here).

OWNERS OF RECORD This requirement speaks directly to the assignment/contract vendee flip transaction and therefore, the Seller on the original Contract of Sale must hold title to the property.  There can be no intervening deed or assignment of Contract etc. Further, FHA sets forth certain types of documentation that would be acceptable proof of Ownership but also specifically indicates that it is not an exhaustive list: (1) property sales history report; (2) copy of recorded deed from Seller or other such documentation like a property tax bill and (3) title commitment or binder demonstrating seller’s ownership and the date it was bought.  Any of these items are sufficient to establish that the Seller is the Owner of Record for this test.

PROPERTY RESALES OCCURRING 90 DAYS OR LESS FOLLOWING ACQUISITION The rule is: “If the owner sells a property within 90 days of the date of acquisition, that property is not eligible security for a mortgage insured by FHA unless it falls within one of the exceptions to the time restrictions on resales set forth in Section 203.37a(c) of the Regulations”. Those exceptions are as follows:

1)
Sales by HUD of Real Estate-Owned (REO) properties under 24 CFR part 291 and of
single family assets in revitalization areas pursuant to section 204 of the
National Housing Act (12 U.S.C. 1710);
(2)
Sales by another agency of the United States Government of REO single family
properties pursuant to programs operated by these agencies;
(3)
Sales of properties by nonprofit organizations approved to buy HUD REO
single family properties at a discount with resale restrictions;
(4)
Sales of properties that were bought by the sellers by inheritance;
(5)
Sales of properties bought by an employer or relocation agency in connection
with the relocation of an employee;
(6)
Sales of properties by state- and federally-chartered financial institutions
and government-sponsored enterprises (GSEs);
(7)
Sales of properties by local and state government agencies; and
(8)
Only upon announcement by HUD through issuance of a notice, sales of properties
located in areas designated by the President as federal disaster areas. The
notice will specify how long the exception will be in effect.

One essential definition often glossed over is the Date of Acquisition.  Most realtors, loan officers and underwriters are under the mistaken impression that the seasoning clock is reset upon every title transfer.  But, FHA specifically defines the Date of Acquisition as “the date of settlement on the seller’s buy of that property“ (emphasis added).  Therefore, not every title transfer is to be considered in determining the Date of Acquisition for the purpose of the seasoning test.

WHAT ABOUT A TRANSFER OF REAL PROPERTY FROM A HOME OWNER TO A TRUST?

Does a transfer of title from a Homeowner to a Trustee of an inter-vivos,
revocable trust wherein the Homeowner retains 100% of the Beneficial Ownership
of that Trust constitute a Resale of Property within the meaning of 24 CFR
203.37a and HUD Mortgagee Letter 2006-14?

The transfer of title
from a homeowner to a Trustee of an inter-vivos, revocable trust wherein the
Homeowner retains 100% of the beneficial ownership of said trust does not
constitute a Resale of Property, within the meaning of 24 CFR 203.37a and HUD
Mortgagee Letter 2006-14, and therefore, as long as homeowner’s initial
acquisition meets the test set forth in the Regulation and Mortgagee Letter,
the subsequent sale of the real property is eligible for FHA financing, even if
the transfer to the trust is 90 days or less from the sale contract date.

FHA will not provide
financing when the Seller’s Date of Acquisition is 90 days or less from the
Purchaser’s sale contract date. FHA
defines the Date of Acquisition as “the date of settlement on the seller’s
buy of that property” (pg 2 Mortgagee Letter). The transfer of title
from the Homeowner to a Trustee is not a buy but a mere change of
identity. The trust and the homeowner
share a commonality of ownership and control over the real property. Such
transaction is without consideration and exempt from the payment of state and
local transfer taxes based upon the “mere change of identity”
exception. Therefore, the Date of
Acquisition is the date the Seller originally bought the real property for
consideration.

It is unnecessary and
improper to look to the codified exceptions to the 90 days or less rule,
outlined in 24 CFR 203.37a(c), if the date of the title transfer to the trustee
is 90 days or less than the purchaser’s sale contract date because such date is not
the Date of Acquisition under the Rule and Mortgagee Letter. If the contemplated transaction has a Date of
Acquisition that is 90 days or less than the sale contract date, the Rule
provides certain exceptions to the time restrictions on resales. But, as the date of title transfer to the
trust does not constitute the Date of Acquisition, it is unnecessary to look to
the exceptions provided in 24 CFR 203.37a(c), except if the date the Homeowner bought the property, for
consideration, is 90 days or less from the sale contract date.

CONCLUSION

The real estate flip is not illegal in and of itself.  The often accompanying loan and appraisal fraud is what makes this perfectly legitimate transaction fraudulent and the basis for FHA and other lenders to institute title seasoning underwriting requirements.  If done correctly, the flip often revitalizes neighborhoods and increases home values in the surrounding areas.

I hope that this clarifies exactly what is meant by Title Seasoning and how this underwriting requirement should be correctly applied to a contemplated real property transaction.  Remember, not every title transfer triggers that seasoning clock but be mindful of those that do!

Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock
3. FHA Limits on Cash Out Refinances drops to 85%

Just a heads up on some of the changes that came into effect this past Wesnesday, April 1, 2009, complements of the Mortgage Currency staff:

FHA just released ML 2009-08 – Limits on Cash Out Refinances – going to 85% with case numbers after April 1, 2009. The news is that the 95%’s cash out refi’s are going away – for now!

Plus the 85% will be figured on the Combined LTV!

* New Subordinate Financing: New subordinate financing + new FHA first mortgage + any new junior liens cannot exceed 85% CLTV.

* Existing Subordinate Financing: May remain in place, subordinate to new FHA first mortgage, with no regard for CLTV.

* Modified Subordinate Financing: Newly modified existing subordinate financing that has to be re-executed at closing with new FHA loan is not considered a new subordinate lien. It is treated as existing subordinate financing.Other Reminders

* Delinquent borrowers are not eligible * Must have owned the property at least 12 months

* If owned less than 12 months, value based on the sale price or appraisal–the lower of the two

* Two appraisals required when loan amount exceeds $417,000 (before UFMIP) and is in declining area

* No co-signers or non-owner occupants can be added to meet credit underwriting guidelines

Mortgage Talking Points

Tags: FHA, guidelines, cash-out, refinance, mortgages

Related posts:

1. Seasoning and FHA’s Time Restrictions on Resales – a Legal Analysis
2. Mortgage Assignments are Not the Real Estate Investor’s Dream!
3. HUD News Release 08-082 FHA Temporarily Lifts Anti-Flipping Rule (Don’t get all excited yet though!)

Fannie Mae Decreases Down Payment Requirements For Homebuyers

Homebuyers who qualify for a conventional, conforming mortgage that is processed through Fannie Mae’s Desktop Underwriter®, as of June 1st 2008, will only need a down payment of 3 percent of the homes value. The new policy will be enforced nationally to help recovery efforts in some of the nation’s toughest hit markets.

Fannie Mae Decreases Down Payment Requirements For Homebuyers

       The Federal Housing Finance Regulatory Reform Act of 2008

Tags: FHA, Fannie Mae, mortgage, foreclosure, loans, real estate, conventional

Related posts:

1. HUD News Release 08-082 FHA Temporarily Lifts Anti-Flipping Rule (Don’t get all excited yet though!)
2. Mortgage Assignments are Not the Real Estate Investor’s Dream!
3. Seasoning and FHA’s Time Restrictions on Resales – a Legal Analysis