Loans and Credit

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!

These “sellers” would offer prospective purchasers such enormously easy terms in the middle of a seller’s market that folks would be lining up fighting to see who could pay the highest price. After this practice had been rolling along for a few years, many of these new home owners started defaulting on their mortgages, thus forcing HUD to pay off the mortgages with money from the FHA insurance fund. The HUD homes advertised all over the place come from these foreclosures. When HUD tried to sell these houses, however, the trouble started. HUD found that the appraisals used to get these loans approved were seriously over inflated, causing huge losses when selling the properties. This endangered the entire FHA program.

Thus several years ago, HUD implemented their “anti-flipping” rule. Now any house that had changed owners within the previous 90 days was absolutely ineligible for any FHA financing. The goal of this rule was to make sure that homes were being sold by legitimate investors who were taking the time to actually bring the property value up before selling it and making a killing.

Of course in HUD’s usual inimitable governmental style they overlooked one tiny factor that created a big problem in the marketplace. They failed to create an exemption for homes that had been foreclosed upon and were being sold by the lender. This excluded a large segment of the potential buyers from the picture and caused lenders to take a big hit in the prices foreclosed property would bring. So in 2006, HUD amended the rule to exclude homes being sold by government sponsored enterprises and federally chartered financial institutions. However, they left the rule 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.

The new, and extremely serious, problem is that this subsidiary often is granted title to the property many months after the actual foreclosure and does not fit into any of the categories exempted from HUD’s anti-flipping rule. They have only owned the property a month. No one in the listing agent’s office knew anything about this, and all the representatives of the lender thought everything was normal. Unfortunately, our aspiring new home owner, who has already given notice to their landlord, is now required to wait 60 more days to close on and move into 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.

This entry was posted on Friday, July 18th, 2008 at 7:39 pm and is filed under Finance.You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.