July 18, 2008
FHA Mortgage: HUD May Prevent Your Loan From Closing
By Carl Pruitt
Several years ago a problem cropped up all across the mortgage/real estate world and started causing a lot of problems for lenders whenever a mortgage defaulted. Every Tom, Dick and Harry that stayed up late at night wanted to become a real estate investor and “flip” houses.
There is a very real market service being provided by legitimate investors who buy distressed property, restore it to market standards and sell it through an arm’s length market transaction. Unfortunately, these investors flooding the market didn’t quite fit that description. They would make an offer on a property having no possible way to finance it or to pay cash and then go in and sweep it up and mop a little before the closing. Simultaneously, they would find some sap who didn’t really understand what was going on, agree to pay all their closing costs and down payment assistance, and get them qualified for an FHA loan. Next would follow a set of back to back closings where they would buy the property and sell it to the new buyer without ever having put up any money of their own. Often at double the price they paid originally!
These “investors” would give the new purchaser such easy terms - even in a seller’s market - that prospective homeowners would be lining up around the block. The problem was that after this had been going on for several years, many of these new home owners started defaulting on their mortgages and HUD would be required to pay off the lenders from the FHA insurance fund. These are the HUD homes advertised in the weekend papers. The giant problem developed when HUD tried to sell these houses. Turns out the appraisals on the properties were ridiculously inflated, so HUD was taking huge losses when selling the properties. This put the entire FHA program in danger.
Thus a few years ago, HUD implemented an “anti-flipping” rule. Any house that changed owners within the previous 90 days was absolutely ineligible to qualify for FHA financing. The purpose of this rule was to guarantee that homes were being sold by legitimate investors and real value was being added by the investor.
In the usual bureaucratic tradition, HUD created another problem with their solution. Foreclosed homes being sold by lenders were not exempted from the rule. This blocked many buyers out of the market and lowering home values even more. Therefore, in 2006, HUD took action and amended the “anti-flipping” rule to allow FHA financing on those homes sold by government sponsored enterprises and federally chartered institutions. There was no change in the rule for other sellers.
Now we arrive at the present. The subprime market has crashed. Foreclosures are setting records every month. Thousands and thousands are losing their homes. But at least, we think, many potential new first time home buyers can now take advantage of this drop in home prices while FHA interest rates are low.
Savvy real estate agents and mortgage brokers who keep up with guidelines are sending these anxious new buyers out into the market. As they look at these foreclosed properties, they never forget to ask the listing real estate agent whether the present owner fits into that financial institution exception. The lender’s agent will say and believe that this home is certainly still owned by the bank and the bank is exempt from the rule. They work out all the details, get everything signed, complete their loan application and get their mortgage in process. Everything is great so far. As usual, the title examination results are faxed over and certainly look fine at first glance. Until the loan processor happens to notice that the owner named on the title policy doesn’t exactly match the contract. So she calls the attorney/title company’s office and finds out that now a subsidiary of the lender which foreclosed on the property now owns the property. This is a common practice lenders employ to manage their real estate owned portfolio after foreclosure.
Unfortunately, this subsidiary, which often receives title to the property months after the foreclosure, is not exempt from the “anti-flipping” rule and has only owned the property a month! Usually even the listing agent is unaware of this and no one at the lender’s office thought anything odd about it, but our eager new homeowner who has given 30 days notice on their apartment must now wait 60 more days before they can close on their new home.
Loan originators must take great care to warn real estate agents and borrowers, about this rule. Make certain that everyone goes into great detail asking questions about the chain of title on each home before setting any closing dates. This situation is fairly easy to deal with when caught early and planned for, but it will be absolutely devastating if this detail is overlooked.
Topics: Credit |
Comments
« A Quick Overview Of Online Poker SNG Tournaments | Home | Low Rate Loans »