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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 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.

Now You See It…Now You Don’t – is HUD Squashing Tax Credit as Down Payment Program????

Kathleen Scanlon — Mon, 18 May 2009 13:02:00 +0000

I blogged last week about FHA's new plot to allow prospective purchasers to monetize the first time Home Buyer's $8,000 tax credit and use it as a down payment on the buy of a home. The Secretary of HUD made statements at a NARS meeting about the revolutionary plot and HUD drafted a Mortgagee Letter (ML 09-15) describing the plot more in depth (which I personally viewed and read on their website).

But, ML 09-15 has disappeared from HUD's website and we are left wondering if HUD is already pulling the plug on this plot…

FHA Limits on Cash Out Refinances drops to 85%

Kathleen Scanlon — Fri, 03 Apr 2009 14:56:53 +0000

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

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

HUD News Release 08-082 FHA Temporarily Lifts Anti-Flipping Rule (Don’t get all excited yet though!)

Kathleen Scanlon — Tue, 17 Jun 2008 12:20:41 +0000

FHA EXTENDS FINANCING FOR IMMEDIATE BUY OF FORECLOSED HOMES Measure seen to bring stability to home values and accelerate sale of vacant properties

WASHINGTON – In an effort to stabilize declining home values in certain neighborhoods, the Bush Administration today announced a temporary policy that will extend government-backed mortgage insurance and allow for the immediate sale of vacant foreclosed properties.For one year, the Federal Housing Administration (FHA) will insure foreclosed properties marketed and sold by property disposition firms on behalf of lenders. The properties, which must bought by owner-occupants, will no longer be subject to the customary 90-day waiting period.”A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery,” said Brian D. Montgomery, Assistant Secretary of Housing-Federal Housing Commissioner. “The action we take today will allow homebuyers to buy these homes in much greater numbers and ease the excess supply of unsold homes in neighborhoods across the country.”FHA’s new temporary policy will help stabilize neighborhoods experiencing high rates of foreclosure by reducing the inventory of unsold properties. Many foreclosed properties remain vacant for months, inviting vandalism and reducing values of surrounding homes. To address that sizeable inventory, lenders have hired companies that specialize in the marketing and disposition of foreclosed homes. It’s reasonable and appropriate that these firms have the ability to sell the properties to borrowers using FHA financing.With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This prohibition is intended to prevent property “flipping,” a predatory practice that strips a home of its equity before being quickly resold at an inflated price to an unsuspecting buyer. FHA’s new policy will permit the immediate sale of foreclosed properties to legitimate borrowers wishing to use FHA-insured financing.

HUD News Release 08-082

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Tags: FHA, REO, foreclosure, flipping, resale, property, mortgages