Loan Modification

FHA Offers 10% Discount on Foreclosed Properties

By Peter G. Miller

The FHA is an unused mortgage insurance plan for most borrowers, but when things go wrong and claims are made the FHA loan program evolves into something else, an owner of real estate — and more importantly an owner of real estate the government wants to unload.

In May 530,140 FHA loans were seriously delinquency. That’s a big number but most of those delinquencies will be “cured,” brought up-to-date and not foreclosed. Some borrowers, however, will not so lucky: Since October the FHA has foreclosed 63,019 properties and also taken a loss on 9,078 short sales.

Like every lender or insurance company with REO properties (”real estate owned”), HUD wants to clean out its inventory as quickly as possible. Now it’s moved to speed up the process by selling foreclosed homes with a 10-percent discount — but not to you or me.

The FHA Plan

Under the Housing and Economic Recovery Act of 2008 the government set aside almost $4 billion to prop up local communities under what is generally known as the Neighborhood Stabilization Program (NSP). Now HUD is saying that under the FHA loan guidelines state and local governments as well as nonprofit organizations are welcome to buy HUD homes to rent or re-sell at a discount.

How much of a discount? That would be 10 percent below appraised values, less the cost of any applicable listing and sales commissions.

In essence, the Federal Housing Administration’s (FHA’s) “First Look” sales method gives an exclusive option to local governments and non-profits to purchase HUD at discount for a period of 14 days. After 14 days the properties then become available through the usual HUD marketing process. The program will continue through May 31, 2013.

Why Not Investors?

Across the country you can find local housing programs which take foreclosed or abandoned properties, rehab them, and then add them to the local housing stock. In this process a property is converted into real estate that pays taxes, pushes up neighborhood values and is occupied by a tenant or owner.

The HUD “first look” plan is obviously intended to speed the reclamation process along by giving incentives for local governments and non-profits to acquire local properties. This makes sense on a lot of levels. Neighborhoods have fewer abandoned homes and HUD comes out ahead when its stock of foreclosed properties is reduced.

Alternatively — and despite the good intentions of the HUD program — the “First Look” effort raises some questions. For instance: Why not give everyone a discount simply to empty-out HUD’s vast stock of foreclosed homes? This would lower HUD’s inventory of foreclosed properties and thus reduce massive carrying costs.

Whether a home is bought and fixed up by a non-profit or a capitalist investor the practical result is the same: There is one less empty house holding down local home prices and one more home that is occupied. Given tough times in the housing market it’s difficult to see why HUD does not allow anyone with a pulse and a check to buy it’s properties at discount, perhaps with a system that gives states and non-profits the first 14 days to purchase, then another 14 days of exclusive access to the inventory for owner-occupants and finally access for anyone who wants to buy for any reason.

Full post as published by FHA Mortgage Guide on July 13, 2010 (boomark / email).