FHA Suspends So-Called Anti-Flipping Policy
Hoping to stabilize free-falling home prices in foreclosure-plagued neighborhoods and stimulate sluggish housing markets, the White House has announced that for one year only, the Federal Housing Administration will suspend its anti-flipping policy which requires a 90-day waiting period for foreclosure sales. At the same time, it’s extending government-backed mortgage insurance to a larger group of foreclosure buyers.
Rehab this Foreclosure Flip
Though a positive step towards resuscitating stagnant real estate markets, these homes still have to be sold to owner-occupants, and many flippers may find that this policy change is of little help to their businesses. To meet FHA guidelines requiring that homes be “safe, secure and sound,” many of these real estate owned (REO) homes likely will require more extensive rehabbing than they would probably receive if the FHA were not involved.
Homeowners who can’t afford their mortgage payments probably don’t keep up with maintenance. And there is an increasing prevalence of disgruntled and distressed homeowners vandalizing their homes when they’re forced out by foreclosure. Though real estate investors with a knack for rehabbing may see some benefits through this change, it seems unlikely that it’ll have the far-reaching impact on high-foreclosure real estate markets that the Fed is hoping for.
REI to the Rescue
What irks me is that this waiting period foolishness was implemented five years ago specifically to curtail opportunities for working real estate investors to make money in real estate by flipping houses for a living. Now that the economy is a wreck and the current selling season is not stopping the bleeding, who does the government call upon to get the markets moving again? Real estate investors, do you hear your phones ringing? Here is how the FHA rationalizes its flip flop on this issue:
” . . . 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.”
Will the Real Equity Strippers Please Stand Up?
What exactly did the lenders accomplish with their business practices? The Mortgage Bankers Association’s (MBA’s) Q1 report highlights the sixth straight record-shattering quarter of home loans entering foreclosure. The MBA’s seasonally adjusted total delinquency rate is the highest recorded by the association since 1979: Nearly 3 million home loans, or 6.4 percent, are missing at least one payment, while approximately 737,000 are three months or more past due on their payments. These numbers all but promise that foreclosure rates will continue to rise.
According to the MBA, 1.1 million homes, or 2.5 percent of all loans serviced by the association’s members currently are in foreclosure. That’s up from the 2 percent of loans, or about 938,000 homes, that were in foreclosure at the end of 2007. The report also shows that 448,000 homes, or about 1 percent of loans members serviced, entered foreclosure during Q1. In Q4 2007, 382,000 homes reportedly entered foreclosure.
Foreclosure Epidemic Spreads Beyond Subprime Loans
These aren’t just the subprime adjustable rate mortgages (ARMs) we’ve heard so much about. Foreclosure among all loan types is on the rise. Here is a quick breakdown, according to Jay Brinkmann, MBA’s Vice President for Research and Economics:
- While subprime ARMs represent 6 percent of the loans outstanding, they represented 39 percent of the foreclosures started during Q1.
- Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started.
- Among the 516,000 foreclosures started during the Q1, subprime ARM loans made up 195,000 and prime ARM loans made for 117,000.
- The hike in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.
Who Takes the Prize?
Though our industry will see some benefits from the FHA’s temporary suspension of the 90-day waiting period for foreclosure sales, is it really going to put a dent in markets where REO inventories are growing while prices hit the pavement? We may never know for sure because REO sales are rarely tracked.
In a recent press release, Brian Montgomery, assistant secretary for the FHA commissioner says, “A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery. The action we take today will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes in neighborhoods across the country.”
Too Little, too Late?
So while Federal officials have finally noticed that the effects of the foreclosure epidemic aren’t limited to Wall Street — and the buyers — who really should have known better, some loaded questions remain on the table:
- How far is this temporary FHA policy shift really going to go to get troubled real estate markets moving?
- Will the capital FHA offers buyers raise the bottom for declining markets?
- Will this policy have any impact in getting REO lenders to speed up their response times?
- If the fed needs real estate investors to come in and clean up after the lenders and help them move their REO, equity-free, dead weight, are we still engaging in a “predatory practice” ?
How will this temporary change in FHA policy make a difference in the way you invest in real estate? Please drop me a line and let me know what you think. Also, if you’re interested in learning more about the REI news and developments that affect your business, don’t forget to sign up for my “What’s Working & What’s New” monthly report on GaryBoomershine.com.
Tags: anti-flipping policy, distressed homeowners, Federal Housing Administration, FHA, FHA guidelines, FHA policy, FHA-insured financing, flip houses for a living, flipping houses, foreclosed properties, foreclosure, foreclosure blight, foreclosure buyers, foreclosure flips, foreclosure rehabbing, government-backed mortgage insurance, home depreciation, home equity, house Flippers, invest in real estate, make money in real estate, Mortgage bankers association, prime ARM foreclosures REO home inventory, real estate investors, real estate market, real estate markets, Real Estate Owned property, rehabbing property, REO Lender, safe secure and sound, sluggish housing markets, subprime ARMs
June 17th, 2008 at 10:28 pm
Gary,
You said, “…our industry will see some benefits from the FHA’s temporary suspension of the 90-day waiting period for foreclosure sales…”
I’m not following you, brother. I don’t see how this 1 year FHA waiver will effect investors at all. Through this waiver, FHA financing is now available to borrowers purchasing properties owned less than 90 days that were acquired by foreclosure by mortgagees (i.e. lenders). It also pplies to any subsidiary of the lender or vendors they may use to market and sell the property.
But I don’t see the waiver applying at all to investors. We’re still stuck with the 90 day seasoning requirement, unless we’re the ones who actually foreclosed on the property. So I guess I could see investors benefiting if they buy the defaulting note and then foreclose.
Check out my blog post from yesterday about it: http://reitips.com/fha-seasoning-suspended/
…jp
June 18th, 2008 at 1:45 pm
Thanks, JP. I would recommend your post to anyone who wants to learn more about this issue. While I see your points and find them to be excellent, don’t you think it’s a little soon to be saying that the FHA’s temporary “anti-flipping” rule suspension will have no absolutely no impact on the REI community?
As I said, “many flippers may find that this policy change id of little help to their businesses.” Still, I believe that the policy change is likely to have a positive effect on the real estate markets that have been choking on foreclosures. When that happens, we’ll have more options to develop and implement strategies to make money in real estate. I see this as a plus.
Like many of us, I’ve looked at FHA’s waiver language and puzzled over how they’re defining “vendor.” Still, providing for any sort of “middleman” position in between REO lenders and the market is likely to benefit investors either directly (if some of us assume that position and manage to profit from it) or indirectly (if the policy change succeeds in its goal of stabilizing prices and stimulating market activity).
Even if real estate investors become “vendors,” rehabbing costs are higher than ever, so bringing many of these foreclosure properties up to FHA guidelines poses an awesome challenge, even if weren’t for the massive price drops we’ve seen in real estate markets hard-hit by foreclosure. Still, I have faith that if anybody can find a way to make money here, the REI community can. Although it may be too soon to know exactly how REI will capitalize on this development, the innovation and resilience I see in our community always amazes me.
Buying homes when prices are down and selling them when prices rise is an excellent strategy for investing in real estate, but most of us prefer to have more than one way out of a deal. If FHA’s waiver succeeds in providing real estate investors with options, then I see it as a positive step — even if it’s a small one.
Another point that I made in my post is that the Fed’s so-called “anti-flipping policy” did more to reveal the government’s generalized ignorance about how our industry works than it did to protect consumers. Their rationale for implementing this policy was to discourage the “predatory lending” and collusion they automatically associate with flipping. Has this policy protected anyone? Or did it unfairly seek to regulate our business practices without legitimate cause?
Looking at many of the loans that lenders extended to consumers, it seems to me that the Fed’s time and money would have been better spent scrutinizing the real predatory lenders. Now, by suspending its so-called “anti-flipping” policy, the Fed is going out on yet another limb for suffering REO lenders who, like consumers, should have known better than to get involved with the risky mortgages to begin with. Who pays for these mistakes? If you operate your own business, you know the answer.
I agree that this isn’t an occasion for Champagne. But what’s a good mixer for irony? If you need a chaser, try this: It appears that in 2003 when the Fed’s “anti-flipping” policy went into effect, then Housing and Urban Development (HUD) Deputy Secretary Alphonzo Jackson was getting a sweetheart mortgage deal from Contrywide’s head Angelo Mozilo. You may recall that Jackson resigned from his leadership post at HUD a few months ago amid accusations of cronyism.
Go get ‘em JP. Your post on this issue are among the best I’ve seen. Please, keep on sharing you lively wisdom and analytical skills with the rest of us. Let’s hope that your common sense is as contagious as the foreclosure epidemic in Florida!
June 18th, 2008 at 3:01 pm
I’m posting this for JP Moses:
By JP Moses on Jun 18, 2008 | Reply
@Gary Boomershine - Some really excellent points in there, Gary. And never let it be said that you’re not a man of words and action.
It’s not that I don’t think the FHA waiver will have any impact at all in the REI community. But it won’t have the effect many of us did initially. If someone can get clarification on exactly what kind of “vendor” the waiver might be referring to, then maybe we can figure out if/how an investor might put himself in that role. I’d appreciate anyone else’s insight on that particularly.
It also seems to me that in order for a mortgagee (lender) to be able to benefit from this waiver, they’re going to have to look at rehabbing many of the REOs in their inventory. Otherwise most of them won’t meet FHA’s standards for property condition, so the waiver would be useless. So it’ll be interesting to see how/if this effects the way banks deal with their inventory at all.
Thanks again for your insightful feedback. Anyone else?
June 19th, 2008 at 2:49 pm
I’m posting this for Brian Dicherson.
I’ve had a lot of questions from clients in the last 2 days on the announcement Friday regarding the lifting of the FHA 90-day seasoning requirement. Apparently, there’s a lot of misinformation floating around.
I went ahead and wrote a quick summary of the whole situation, which I posted here:
http://briandickersonflips.com/blog/?p=39#more-39
I also posted a copy of the ruling to clarify.
Hope it’s helpful! Feel free to pass it on as you see fit.
Best Regards,
Brian Dickerson
July 4th, 2008 at 7:29 pm
Gary:
We checked with Fifth Third Bank - FHA specialists (this week,we have contacts) and we as investors do not qualify as a vendors. We ( Fresh Start Property Solutions) short sale properties, pay cash and resale the same day. If you can become a vendor by becoming an REO company you might have a chance to qualify. We are going to tell our story to the FHA and see if we could become a qualified vendor. We keep neighborhoods from deteriorating, we get banks paid off, we give the ex-homeowner a fresh start (no liability for mortgage) and we give new homeowners a home at normally below market value. Everybody is a winner. We have a better impact than FHA itsself and most REO vendors. A few bad apples have made it for tough for the honest good guys. Would like to talk some time.
Steve,
Thanks for sharing this information. Please keep us posted on your efforts to become a “qualified vendor.” I would love to write a blog post about how this goes for you.
Sounds like your efforts to position yourself to profit here while helping to clean up the lending mess are nothing short of brilliant! Cheers to you!
Funny, I read a CNN article the other day that called real estate investors like us “vultures.” It amazes me that people fail to see the value of the services we provide — to communities as well as the markets.
If we’re “vultures” what are the lenders?!
Thanks again for your post. Can’t wait for an update! Hope your patience and determination really pays off!
Gary
July 4th, 2008 at 9:26 pm
Has nothing to do with investors, this is designed to help financial institutions only.
July 6th, 2008 at 4:50 pm
It’s all still smoke and mirrors and one giant cluster-F in the real estate industry now. We still haven’t cleaned out the dishonest players, and so far they will be benefiting from most proposals by old-line politicians. I think we need our famous housing activist in office in Nov. Here we have many real estate flippers who have ruined our local markets with their greed and foolishness. Far from shoring up our hoods, they make me embarrassed to be part of the real estate fringe. And if you confront many real estate gurus online who you know are full of it, they simply drop you from their list when you ask for proof of their outrageous claims. More and more pop up each month, many of whom I recognize from other scams, and some I have seen go on to new, non-real estate related ones. Yet the law lets them skate for a long time. Why is that? I’m sorry, but there is no way the average investor is going to be able to handle 10-15 houses per month and do it well for all concerned. How much money do you need anyway? One of these now has one of his patsies trying to sell me lousy housing in Detroit that they can’t move. His profit margins go down to less than 10% after you go through his ridiculously inflated numbers and get real. Greater fools abound for some slick ones. And another tries to get you to believe that he is offering an old rehabbed to retail house that cash flows more than $700 per month, yet he is selling to ME across the country, along with the rest of his list? Give me a break! I know they are having issues because now the houses that “would be snapped up within the hour” based on his past experience now stay for weeks on these gurus’ lists.
I’ve been around since before Millard and Linda started Habitat for Humanity and it has gotten disgraceful indeed. My state refuses to let investors make more than 18% profit on foreclosures thanks to greedy investors who made the politicos feel they had to change the rules without knowing the industry, and to protect the traditional players. With expenses rising, you can’t even get the rents you need to keep your clogged invetory happy and healthy.
Something has to be done, but I doubt it will come from the real estate investor industry the way the players are acting lately.
Kim,
Thanks for your profound observations. May I ask in what state do you operate? Is it state law that restricts flip profits?
Thanks again,
Gary