FHA waiting period change intended to help lenders get REOs off the books

In an attempt to help lenders speed the process of getting real estate-owned
properties off their books, the Federal Housing Administration will temporarily
lift a 90-day waiting period for property resales financed by FHA-guaranteed
loans.

The 90-day waiting period -- instituted in 2003 to counter predatory lending
and house flipping -- never applied to properties sold by Fannie Mae, Freddie
Mac, or state- and federally chartered financial institutions.

But it can be hard to determine which lenders are exempt from the rule, and
many who are exempt prefer to transfer title to REO properties over to property
disposition firms that are not exempt, FHA officials say. Because a glut
of foreclosed and abandoned homes harms neighborhoods and delays a community's
recovery, FHA will lift the waiting period for one year.

"The action we take today will allow home buyers to purchase these homes
in much greater numbers and ease the excess supply of unsold homes in neighborhoods
across the country," said Federal Housing Commissioner Brian Montgomery in
a statement announcing the change.

But because FHA also requires that homes purchased with loans it guarantees
to be in "safe, secure and sound" condition, lenders still won't be able
to resell many of the homes they've foreclosed on to FHA-eligible buyers
until they make the repairs needed to bring them up to FHA standards.

"It's not going to have as much an impact as one would assume, because most
of the properties aren't going to meet FHA standards," said Glen Daniels,
director of real estate-owned properties for the distressed and foreclosed
property listings site, Foreclosure.com.

Daniels -- who once managed $243 million in REO properties for Ocwen Financial
Corp. -- said that if the previous owner of the house was unable to make
the mortgage payments, the chances are good that he or she was not keeping
up with maintenance.

Lifting the 90-day waiting period does give lenders more incentive to repair
REO properties, Daniels said. Under the old standard, lenders that chose
to renovate a property would still have to wait 90 days to sell to a buyer
using FHA loan guarantee programs.

With FHA loan programs accounting for a growing share of mortgage lending,
"I assume a lot more lenders will take that option, to rehabilitate a property,
bring it into FHA compliance, and sell to a home buyer" who is eligible for
an FHA-backed loan, Daniels said.

According to the Census bureau, there were 129 million housing units in the
United States, and 18.6 million were vacant during the first quarter. Those
vacancies include 4.1 million rentals, 2.3 million for-sale homes, and 7.5
million "vacant for a variety of other reasons" that include foreclosure.


While Daniels doesn't see FHA's new policy having a big impact in the short
run, it might help stabilize property values in the long run. That's because
if lenders choose to rehab properties before selling them, they won't discount
their asking price as much.

In justifying its waiver of the 90-day waiting period, FHA said it would
reduce the impact foreclosures can have on the value of adjoining and nearby
properties.

When FHA announced the 90-day waiting period in May 2003, it said the most
egregious examples of predatory lending were often seen on "quick flips,"
in which homes sometimes resold within a few days.

The rule, "FR-4615 Prohibition of Property Flipping in HUD's Single Family
Mortgage Insurance Programs," also requires lenders to obtain a second appraisal
on properties resold within 91 and 180 days if the resale price exceeds the
previous sale price by 100 percent or more (see letter to lenders).

FHA officials say the threshold was set relatively high to allow legitimate
rehabilitation efforts while deterring unscrupulous sellers, lenders and
appraisers from defrauding home buyers

But one veteran property rehabber told Inman News that convincing the FHA
that a property wasn't an illegal flip after the 90-day waiting period expired
could be "a nightmare."

"We would take a shell and turn it into a castle," said Duane LeGate, president
of HBN Interactive. "Half of the potential buyers couldn't qualify for my
properties because of the rule. Even when the 90 days expired, you had to
show FHA before-and-after pictures, full documentation of all work done to
'prove' that the property wasn't an illegal flip."