A few years ago, during the real estate boom, an unforeseen problem began occurring regularly that created quite a problem for mortgage lenders when they had to foreclose on a home. Everybody who had ever stayed up late watching TV suddenly wanted to become a real estate investor. A “house flipper”.
There is such a thing as a legitimate “house flipper”. This type of investor uses their own money and credit to buy up foreclosures and other distressed real estate, repair the property and then sell it at a profit. This provides an important function in the economy. Unfortunately, the investors flooding the market over the last couple of years never quite matched that description. These master television trained real estate investors would make an offer on a property even though they had no financing of their own. Then they would go in and sweep it up and mop a little. At the same time, they would find some poor uninformed dreamer who didn’t really understand what was going on, agree to pay all the loan closing costs and down payment assistance, and get them preapproved for an FHA loan. They would then set up back to back closings so they could buy the property and sell it to the new buyer at the same time without ever having put up a dime of their own money. They would frequently sell the home 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.
Now we arrive at the present. The subprime market has crashed. Foreclosures are setting records every month. Thousands and thousands are losing their homes. But at least, we think, many potential new first time home buyers can now take advantage of this drop in home prices while FHA interest rates are low.
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.