New Stimulus Takes Affect February 1 to Permit FHA Financing on Eligible Home Sales
HUD Secretary Donovan announced last week that commencing on February 1, 2010, a waiver of existing lending guidelines will be put in place to permit FHA financing to be utilized on homes owned by sellers for less than 90 days "in an attempt to stabilize home prices and accelerate the sale of vacant properties."
Currently, FHA lending guidelines prohibit the issuance of mortgage insurance (and therefore the granting of an FHA loans) on a home owned by the seller for less than 90 days, which has made it extremely difficult for banks who acquire foreclosed properties to resell them. (Note: as explained below, the waiver does not change the HUD restriction on the use of FHA loan products to finance "unseasoned" properties acquired and re-sold by investors in an effort to profit from "flipping" them with or without fixing them up first.
Since FHA loans are the most widely utilized product to finance these properties, this temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties. As stated by Donovan in the release, "As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers". He further stated that "FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization."
Donovan's comments were prompted after FHA research revealed that "acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days." The guidelines prohibiting the use of FHA loans for subsequent sales was viewed as potentially detrimental to an owner's (the Asset Manager, the financial institution owning the REO property or the investor) ability to re-sell the property quickly, leading to higher holding costs, an artificial drag on home prices in the surrounding area - leading to lower appraised values, and an increased risk of vandalism.
FHA will watch for potential abuses of this new change
In order to limit the risk of predatory practices from "flipping" and abuses resulting from the rule change, the HUD has issued a number of conditions regarding eligible sales. Three of the most important items are as follows (full text of the new guidelines can be found here):
In addition to the statements made by HUD Secretary Donovan, FHA Commissioner David Stevens went on to add: "FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties" ... "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."
The rule change is being implemented on February 1, and will be effective for one year, unless extended or withdrawn earlier.