During the real estate boom of the last few years, a brand new problem began cropping up on a regular basis whenever a lender had to foreclose on a defaulted mortgage. Every Tom, Dick and Harry with no money and no credit, but ready access to late night television suddenly wanted to "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! Of course these "sellers" would offer such easy terms (at a time when it was a seller's market and others weren't making such concessions) that they would have a boatload of potential prospective homeowners to choose from. Unfortunately after this had been going on for a few years, some of these new home owners began to default on their mortgages and HUD would have to pay off the lender from the FHA insurance fund. This is the source of all the HUD houses you see advertised in the weekend papers. Trouble is, when HUD was trying to sell these houses they kept having to take a big loss, endangering the very existence of the FHA program.
This resulted in HUD implementing a new anti-flipping rule. If a property had changed owners within 90 days, this property was not eligible for any FHA financing. The goal was to make sure that only legitimate investors who were actually repairing the property and increasing the value would be able to use FHA financing to sell their property. As is usually the case when HUD takes action, they created another problem with their solution.
The new rule contained no exception for foreclosure homes being sold by the lender. This blocked out a huge group of buyers from the market and helped lower values even further. In 2006, HUD changed the anti-flipping rule to allow FHA financing on homes being sold by government sponsored enterprises and federally chartered institutions.
The rule was left in place for all other sellers. So now we are up to date. The subprime market has tanked. New foreclosure records are being set each month. Many thousands are losing their homes. At least there is hope.
Many potential first time home buyers can now take advantage of this drop in home prices while FHA interest rates are down. 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. These subsidiaries of the lenders often obtain title to the property many months after completion of the original foreclosure. The trouble is, they are not exempt from the anti flipping rule and have usually owned the property a month or less.
No one in the lender's office, or the attorney's office every tried to mislead the buyer, but now that buyer who must move out of an apartment in a few days, must wait 60 more days to close on and move into their new house. 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.
FHA Broker Training and an expert understanding of FHA guidelines is vital to prevent being left in the dust in the mortgage industry today. Mortgage originators will make more money and truly help more borrowers by mastering FHA.
