FHA and Fannie: Pushing Foreclosure Sales

Foreclosed Home
Foreclosed Home

Starting today home "Flippers" are now welcome at the FHA.

That's right, with a glut of foreclosures plaguing the nation's neighborhoods, the FHA is temporarily removing restrictions on investors who buy and sell homes within 90 days.

It's just for one year, but Flippers are no longer persona non-grata with the government.

"FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," FHA Commissioner David Stevens wrote in a statement last month. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

So the FHA wants to encourage flipping and turn first-time buyers, who are already getting a tax break, into new real estate speculators? Nope, they just want to get as many foreclosed properties as possible off the market. This opens up a whole new bundle of buyers to current real estate investors who previously couldn't flip the home to a low-income borrower.

The FHA is lifting the ban for just one year and there are some rules.

You can't flip the property for more than a 20 percent profit in most cases and the transaction must be at "arms-length" so friends don't collude to drive up the home value and then snag some unknowing buyer in the end. While banks and financial institutions were always excepted from the rule, private investors, like Oregon-based Gorilla Capital, were not, so this waiver, "will allow companies like Gorilla Capital, who research, assess, and purchase homes at foreclosure auctions, to sell more homes to buyers using FHA financing," says the company's CEO John Helmick. "With an average hold time of 52 days, the FHA 90-day seasoning rule created an artificial barrier to Gorilla selling homes to the general public, and prevented a large portion of the public from accessing the value home prices offered by Gorilla Capital."

And that's not all the government is doing to help buyers soak up foreclosures.

Fannie Mae announced it will offer 3.5 percent seller assistance for buyers of its HomePath properties, that is, foreclosures Fannie now owns. This can be used toward closing cost assistance or appliances, and it's only for owner-occupant buyers who close on the property before May 1, 2010. Today, the Obama budget clearly put the kibosh on seller-assisted down payments, which is essentially what this is, so I guess what's good for the goose is not good for the gander, that is if one of those birds is government entity.

Both the FHA and the Fannie programs, while temporary, are designed to spur home buying and particularly buying of foreclosed properties. They also both add risk to the system, because any time you give a buyer more money upfront, that buyer will likely bite off that much more than they can probably chew. I'm not saying they're bad programs, especially in these desperate times, but I continue to be concerned that many of these so-called "assistance" programs are opening the housing market up again to questionable buyers...which of course is how we got in this mess in the first place. Combine the Fannie assistance with the first time home buyer tax credit, and you're giving homes away for little to no cash all over again.

Look, I get it.

The United States saw roughly 2.8 million foreclosure filings in 2009, and many of those properties are still sitting on the banks and on Fannie and Freddie's collective books.

As continued foreclosures push inventories higher, they push home prices lower.

Getting them sold is arguably a good thing, but aren't we supposed to be putting skin back in the housing game?

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