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submitted: 2008-04-12 02:29:29 | by: CarlPruitt
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Several years ago a problem cropped up all across the mortgage/real estate world and started causing a lot of problems for lenders whenever a mortgage defaulted. Every Tom, Dick and Harry that stayed up late at night wanted to become a real estate investor and "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 "investors" would give the new purchaser such easy terms - even in a seller's market - that prospective homeowners would be lining up around the block. The problem was that after this had been going on for several years, many of these new home owners started defaulting on their mortgages and HUD would be required to pay off the lenders from the FHA insurance fund. These are the HUD homes advertised in the weekend papers. The giant problem developed when HUD tried to sell these houses. Turns out the appraisals on the properties were ridiculously inflated, so HUD was taking huge losses when selling the properties. This put the entire FHA program in danger.

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.

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.

Working with a real estate agent and mortgage lender who are savvy about the rules, these knowledgeable eager new buyers go out into the market and the first question they ask as they look at these foreclosures is whether the owner fits into the financial institution exception. The agent representing the lender says in good faith that, of course, this home is still owned by the bank and the bank is exempt from the rule. They work out their contract, get all the signatures in the right place, get their loan application paperwork signed and in process and everything looks rosy. Just before closing the title examination results are faxed over and at first glance everything looks fine - until the loan processor notices that the owner named on the title policy doesn't exactly match. So a call is placed to the attorney's or title company's office only to find out that now a subsidiary of the foreclosing lender owns the property. The lender always uses this subsidiary to manage its real estate owned 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 officers must be sure to warn real estate agents and potential new home owners, about this rule. Be sure that everyone goes far above and beyond the call of duty asking questions about the chain of title of the home before setting any dates on the sales contract. This situation doesn't cause much difficulty if caught at the beginning and planned for, but can be absolutely devastating if this detail is missed.

About the Author

FHA Broker Training and an expert understanding of FHA guidelines is necessary to prevent being left in the dust in the mortgage industry today. Mortgage brokers will make more profit and really help more borrowers by mastering FHA. Get a totally unique version of this article from our article submission service

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