Government Prepares for Foreclosure Onslaught: FHA's 90-Day Flip Rule is Reversed

Flippers can now sell to FHA borrowers which should help lenders move their bloated inventories. Today's featured property is another Trustee Sale flip.

7 E Smokestone 3 Irvine, CA 92614 kitchen

Irvine Home Address … 7 SMOKESTONE 3 Irvine, CA 92614

Resale Home Price …… $348,000


He made a giant mess

Sloppy disaster

And he left it for the rest

To clean up after

Now the lawyers do their best

To try to divvy up

What's ever left

In the ending you can bet

Everyone feels cheated

Kiss your ass good-bye

Boy you're out of time

You didn't choose life

It's just your luck

You got your turn now

Give it up and

Kiss your ass good-bye

Kiss Your Ass Goodbye — Styx

As we have been watching the Trustee Sale market more closely, we observe a recent trend toward speeding foreclosure. No, lenders are not issuing Notices of Default (NOD) any quicker — there is still massive shadow inventory — but lenders are proceeding to Trustee Sale at a brisk pace once the NOD is filed. In early 2009, most auctions were delayed, and many were delayed several times. Not anymore. The majority of Trustee Sales in Irvine are occurring at their scheduled date with no postponements.

With the huge influx of inventory coming our way, our government is removing any impediments to moving properties quickly through the system. One of these impediments is the 90-day no-flip rule at the FHA, HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS:

"In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today [January 15, 2010] announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties."

There is a rule, widely known among property flippers, that prevents FHA financing from being used on properties sold in the last 90 days (actual FHA regulation):

(b) Time restrictions on re-sales—(1) General. The eligibility of a property for a mortgage insured by FHA is dependent on the time that has elapsed between the date the seller acquired the property (based upon the date of settlement) and the date of execution of the sales contract that will result in the FHA mortgage insurance (the re-sale date). The mortgagee shall obtain documentation verifying compliance with the time restrictions described in this paragraph and must submit this documentation to HUD as part of the application for mortgage insurance, in accordance with §203.255(b).

(2) Re-sales occurring 90 days or less following acquisition. If the re-sale date is 90 days or less following the date of acquisition by the seller, the property is not eligible for a mortgage to be insured by FHA.

(3) Re-sales occurring between 91 days and 180 days following acquisition. (i) If the re-sale date is between 91 days and 180 days following acquisition by the seller, the property is generally eligible for a mortgage insured by FHA.

From HUD Press Release:

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

  • All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
  • In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.
  • The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Flippers everywhere are rejoicing, but they aren't the only ones; fraudsters everywhere must be figuring out how they can game the system. Interesting that official policy and language at HUD and FHA considers flipping "predatory." It is clear from the language they chose that authorities at the FHA are not keen on flippers.

I am a bit unclear on how the predation takes place. If it is an arms-length transaction, and the appraisal is legitimate supporting the value, isn't the flipper merely converting a property back to cash?

I suspect this rule and its repeal are a reaction to retail flippers as I described in The Changing Face of Flipping. If you encourage retail flipping — which this rule change does — it merely inflates prices for families — an arguably predatory practice — but if you encourage Trustee Sale flipping, it provides market liquidity at Trustee Sales where families are generally excluded anyway. IMO, it would have been much wiser to simply carve out an exclusion for Trustee Sales or Mortgage auctions, but that isn't the route the FHA is going. Perhaps the change is also a recognition of lender's new role as property flippers; the more money flippers make, the more money lenders recover from their real estate owned (REO).

Been there done that

Today's featured property was for sale last fall for $300,000, and for whatever reason, it did not transact (2007 Knife Catchers). The current flipper is hoping it had short-sale bids at $350,000 but the lender wouldn't approve the sale.

Should you buy it?

Let's say you make $75,000 a year, and you have $12,000 in liquid savings plus other reserves. You could buy today's featured property for $350,000 and have your monthly cost of ownership top out at $1,750 per month. That is a reasonable DTI at or near rental parity.

If you purchase today, you will be able to afford a fully amortized payment and you will build financing equity by paying off the mortgage, but that is reflected in the $2,380 you are actually spending each month to live there. If the total monthly cash outlays were equal to rent — with prices at cashflow investor levels — then I might be interested, but to simply tread water with a forced savings account is something I could do in a rental, and I have no downside risk.

Saving money versus renting is the financial consideration that should pique the interest of buyers purchasing properties they would not want to live in long term. It isn't an appreciation play, it is a savings play. You don't bank thousands per month for nothing via appreciation, you bank what you can out of your wage income by paying down a mortgage or saving versus renting. It isn't as easy, and it isn't as glamorous, but it is our future.

The buyer of a property like this one should be entering the market well below rental parity in order to save downpayment money for the big house they want later. Renting is not the only path to income savings; owning can be a path to increased savings if the focus is on savings versus renting, but most people don't look on ownership as a cost-saving opportunity because during the bubble, they didn't have to — ownership itself was enriching.

Buying this property only makes sense as an investment if you believe rents will go up, inventory at lower prices will dry up, and therefore resale prices will go up. It is a foolish appreciation play. An owner-occupant might do as well as a renter if they hold for five years, and perhaps better if they hold longer. There is the intangible element of "owning," but second-story apartment condos don't exude pride-of-ownership like more desirable detached properties. Do you want to spend the next 5 years here?

(pictures below are from the previous listing and do not reflect any pergraniteel installed by the flipper)

7 E Smokestone 3 Irvine, CA 92614 kitchen

Irvine Home Address … 7 SMOKESTONE 3 Irvine, CA 92614

Resale Home Price … $348,000

Income Requirement ……. $73,127

Downpayment Needed … $12,180

3.5% Down FHA Financing

Home Purchase Price … $295,000

Home Purchase Date …. 10/23/2009

Net Gain (Loss) ………. $32,120

Percent Change ………. 18.0%

Annual Appreciation … 50.6%

Mortgage Interest Rate ………. 5.13%

Monthly Mortgage Payment … $1,830

Monthly Cash Outlays ………… $2,380

Monthly Cost of Ownership … $1,750

Property Details for 7 SMOKESTONE 3 Irvine, CA 92614

Beds 2

Baths 1 full 1 part baths

Home Size 917 sq ft

($379 / sq ft)

Lot Size n/a

Year Built 1980

Days on Market 4

Listing Updated 1/27/2010

MLS Number S603193

Property Type Condominium, Residential

Community Woodbridge

Tract Pv

Quiet,inside loop location. This turnkey Upper end unit with good size balcony is at one of the best locations in Woodbridge. It is facing the park with pool and spa and only a few blocks from beautiful South Lake Beach Club, Lagoon, tennis club, and Meadowpark Elementary School. There are over $15,000 of upgrades throughout… New hardwood flooring, New paint, New granite kitchen countertop, brand new waterheater and furnance. Move In condition.

I am in favor of compounding words, but "waterheater?"

furnance? Is that like flaming finance?

Furnance: the place toxic mortgages burn and smolder in the Federal Reserve's vault.

38 thoughts on “Government Prepares for Foreclosure Onslaught: FHA's 90-Day Flip Rule is Reversed

  1. Planet Reality

    Why would I buy this crappy condo for $350K, when I was told on this very blog I would be able to get a small single family house for this price at bottom.

    Hell, this year I’m supposed to be able to buy a Malibu beach cottage for $550K.

    FHA 90 Day Flip rule? Please that is just the tip of the iceberg in market manipulation by the government. Don’t think you will see more extreme government intervention? Oh, that’s right, the government will stop buying MBS and end the housing tax credit in just a few short months. Step right up and buy the brooklyn bridge.

    1. Chris

      An end to a govt intervention is another beginning of another one.

      Don’t keep your hopes up. The only way the game is over is when USD crashes and becomes worthless. By then, $1 million homes are actually cheap…by Chinese standards after they depeg 🙂

      1. AZDavidPhx

        Chris is right – it works until it doesn’t work anymore.

        When gasoline starts fetching 10.00$ a gallon – it’s going to be a tough slog to make that mortgage payment.

        I also agree that all this talk about the end of tax credits and Fed MBS purchases is a delusion – they are going to be “Extended” and reinforced with more hot air just like they have been doing with everything else.

        This is how the government works – they create these phoney deadlines and keep a straight face and hold the course until the very last minute and then pretend to be shocked and dismayed at the results along with the rest of us followed up by a pledge of righteousness to keep up the fight for us by extending all these junk programs that are not working and at each step Doing More to “help”.

        This is what you get when you demand that politicians help you.

        1. Geotpf

          Gas won’t probably won’t cost ten bucks a gallon for fifty years. So your thirty year loan should be paid off by then.

    2. Geotpf

      Jim the Realtor currently has a beach cottage for sale in Oceanside for about that much if you are interested. 😛

  2. IrvineRenter

    Rising FHA default rate foreshadows a crush of foreclosures

    “The share of borrowers who are falling seriously behind on loans backed by the Federal Housing Administration jumped by more than a third in the past year, foreshadowing a crush of foreclosures that could further buffet an agency vital to the housing market’s recovery.

    About 9.1 percent of FHA borrowers had missed at least three payments as of December, up from 6.5 percent a year ago, the agency’s figures show.

    Although the FHA’s default rate has been climbing for months and eating into the agency’s cash, the latest figures show that the FHA’s woes are getting worse even as the housing market shows signs of improvement. The problems are rooted in FHA mortgages made in 2007 and 2008. Those loans are now maturing into their worst years because failures most often occur two to three years after a mortgage is made.

    If the trend continues and the FHA’s cash reserves are exhausted, the federal government would automatically use taxpayer money to cover the losses — a first for the agency, which has always used the fees it charges borrowers to pay for its losses.

    As these loans from 2007 and 2008 go bad and clear off of the FHA’s books, agency officials said, losses are expected to taper off, aided by the housing market’s anticipated recovery and an influx of more creditworthy borrowers, who have flocked to the FHA’s home-buying program in the past year.

    Agency officials said they have cracked down on poorly performing lenders and announced higher qualifying fees for borrowers. On Monday, the agency projected that the fees should generate $5.8 billion in fiscal 2011, up from $2 billion this year. That would fatten the FHA’s cash cushion, used to cover unexpected losses.”

    1. AZDavidPhx

      A bailout is coming for FHA – guaranteed. Of course that is not what they are going to call it. My guess is we’ll be seeing them “Borrow” a few hundred million here there and “promise“(wink wink!) to pay it all back.

      So basically the government is writing itself IOUs and monetizing them with nothing but hot air as collateral.

      All this talk about ‘cracking down’ on lenders and upping debtor qualifications is pure Kabuki; theatre to pretend that it is not some kind of repeat of the subprime lending game with Big Brother co-signing all the stinky loans.

      1. newbie2008

        The USA is good as gold in paying back banks loans and T-bills and bonds. The govt has unlimited power to tax. Pay or else to its citizen. Non-citizen are a different matter (Beatles compared to Willy Nelson).

        One bank/insurance company is accepting home loans with 30% down using part of their own money. But most of the current home loans by banks are just processing the paper work for the FHA and a less extent to Freddie or Fannie. It’s not their own money — If the new borrowers default, it’s the taxpayers’ problem. The banks have already collected their fee.

    1. Swiller

      Probably, but it’s only a modification to keep someone in a home that is VASTLY over priced. I personally have not heard of ONE person getting a loan modification with a principal reduction. They just find creative ways to keep people on the hamster wheel. One lady in our complex got a 40 year loan, AND there’s a $75,000 balloon payment that floats along with the loan and is due either when the house is sold, or the loan matures in 2049. 2049!!!!
      Principal reductions NEED to be made, but there should be a rider on it so when the home sells, the american people get their MONEY BACK. No one should get a free ride…period. We have enough damn government welfare already. I was at a party a few weeks ago and out of 12 people there, only my friend and I had a full time well paying job, the rest were on unemployment, disability, and social security.
      Government cheese…government mortgage, any difference?

      1. AZDavidPhx

        Swiller –

        Your logic would be just as applicable for any house purchase.

        Why not put all house buyers into 200 year loans with 1 million $ floating balloon payments due in 2210?

        We could get everybody a sweet monthly payment by doing that and house prices could continue “steady growth” for a long time.

        This solution would fix all of our problems, wouldn’t it?

        This is just taking your thinking and scaling it up.

        You seem to have this idea that banks have unlimited money to just go and dish out loan mods to everybody. When they reduce that principal by X$ it comes straight out of their earnings and that means less bonuses to hand out at the end of the year. Why go out of business when you don’t have to?

        At least when the debtor defaults, they can put the house on the backburner and pretend that it’s worth what they wish all while keeping their books on the up and the bonuses tossed around like candy.

        Granted, the money that you and I pay in taxes will be used to cover their losses either way – but why amplify the losses by advertising principal cuts and have to deal with a bunch of pissed off voters?

        It’s not going to happen – stop with all the principal reduction malarky – let the debtors default in peace.

        1. Swiller

          I totally agree that the market should be left alone to correct itself….I’m one with you on that 100%, BUT, that’s not what IS happening. If the government is going to subsidize the mother loving homes, then at least benefit some of the PEOPLE and not just benefit the banks at the EXPENSE of home loss AND taxes from the ones who didn’t get caught up in all this fraud. That’s my point.
          Now, if you are going to extend and pretend, you might as well do it with the PEOPLE Living in the home. Sure, the house has a $50,000-$100,000 rider on it, but if the people IN the house are paying a bit more than rent, they will STAY in the house. It’s about survival. Do you honestly believe that of the 4 MILLION defaults last year they were ALL by people scamming the system? And who controls “the system”? And who let these loans start in the first place, not too mention getting out of control enough to bring society to it’s knees?
          I’m all for personal responsibility, but if you can’t admit this game was rigged from years ago, you either cannot see, or refuse to see. In fact, the game is still being played and many readers at these types of blogs are just waiting when the best time is to place their bets. It’s boiled down to that…Wall St., or property, and Wall St. managed to bring them together so it’s one and the same now.
          There are times when civil disobedience is okay, and with the massive scam that I’ve seen so many families lose everything, I’m just dandy with them getting a chance to live for free for a few months to try and rebuild a SECURE future.

        2. ochomehunter

          AZDavidPhx, I agree with you. If Investor who invested in MBS/CDO and/or bank who owns the loan has to choose loan modification of homeowner who stopped paying vs foreclosure, Banks/investors may chose to foreclose or sell as REO because this way banks can get 20% downpayment from new buyer and banks finance only 80% of the money thereby minimizing their downside risk.

          By loan modification, homeowners have no skin in the game and they can, may, and will walkaway again at very first sign of price weakness.

          I think its about time we get flood of inventories out in the market.

    1. IrvineRenter

      Foreclosure Radar has detailed lists of Trustee Sales; in fact, they recently added a function where they show you every auction scheduled for the next couple of days in areas you specify and tell you where the auction will take place. Their service is great; we build our service on their base data and expand it to deliver more pertinent valuation data and bidding advice.

      1. Walter

        Does your service include a title report? Title risk is one of the main reasons I am cautious on the trustee sale route.

        1. IrvineRenter

          Yes, we pull title on the property, and on the owner to check for judgment liens. As an extra precaution, we actually go to the Recorder’s office to check for ourselves. It is time consuming, but our Trustee Buyer said he always did that for himself, so we must for buyers as well. We also have a relationship with First American who will issue a unique form of title insurance to Trustee Sale buyers.

          1. Chris


            Where can I find more information about your trustee auction services? Should I just call Shevy Akason?

          2. MRexpert

            if someone is going to buy a house at auction, i’m glad IHB can assist with all of the info that the reports provide. In my industry niche, we are getting a lot of angry home purchaser calls who thought they bought a discounted home at an affordable PITI, only to learn that there’s mello-roos and other special assessments that they were not aware of and thus increases their monthly outlay to what they may not want to pay/afford.

  3. newbie2008

    Makes sense if rent are going up, but they have been coving down and vacancy rates have been going up. Where are the people going? Or doubling up (moving in with friends and family)?

    FHA/Fannie/Freddie just another name to move the banks’ liabilities to the middle class taxpayers. Privatize the banks’ profits, socialize the banks’ loss. welfare for the wealth. Let the market drop to affordable levels and then cut out the middle man.

    Remember: Buy before you’re priced out of the market. The condo price when up by 18% in less than a half year. Next year you will need to pay 36% more. ;} Get real $379 per sq. ft.

  4. Soylent Green Is People

    When this was announced, most Tards in my neck of the woods greeted this news with fervor equal to the IPad release buzz. Very, very few of them realize just what is coming down the pathway… The signs are all there:

    2009 – Unlimited FN/FR guarantees. HAMP changes to further extend and pretend into April 2010. Treasury outlines sub $729k SS guidelines. Zero Foreclosure / REO changes other than speeding the process in lieu of moratoriums.

    2010 – (so far) FHA 90 day flip rule easing. Reaffirming HAMP deadlines with slight changes to documentation rules (window dressing). March ends the Fed MBS purchases. April ends the FTHB tax credit. April will also show a gigantic reduction of income tax receipts. May is when California, New York, and other areas run out of gimmics and cash simultaneously.

    I’d say June is when we hit critical mass. Does the market supernova with new Federal incentives (debt), or implode into itself like a black hole? I can’t wait to find out.

    My .02c

    Soylent Green Is People.

    1. Swiller

      Most people prolly don’t remember the movie Soylent, but I do. Anyhow, I tend to agree with your dark dismal view and it makes me want to stash money, food, water, and supply up if the shit hits the fan. It could….Lord forbid it, but it could.
      Heck, you have people posting he about how Irvine P.D. has military weapons and all. I’m sure if it got really really bad, those weapons wouldn’t get in the hands of someone else now would they 🙂

      1. newbie2008

        As long as the masses are well fed and entertained, there will not be riots in Irvine. If an Irvine riot happens, it will be a spill over into Irvine or associated with a school event.

        For now, guns make too much noise in Irvine for most criminals, and knives and clubs are preferred.

        Storing a week’s worth of food and water with rotation is a good idea. Buffers temporary price inceases and prepared in case of disruption of the supply chain (earthquack).

        1. zubs

          When the IMF goes to help a poor country they demand the country reform their policies before giving that country financial help. That’s when you see people protesting the IMF as the debtor government is forced to affect new IMF rules.

          When the federal government gives money to California, will the feds demand reform as well? There will be much protesting for sure.

  5. lowrydr310

    “Makes sense if rent are going up, but they have been coming down and vacancy rates have been going up. Where are the people going? Or doubling up (moving in with friends and family)?”

    This is an excellent question, and one that I haven’t seen addressed by any of the housing blogs.

    I’m considering a return to Southern California within a few months and I went to visit this past weekend. I noticed that all of my favorite restaurants that were normally packed full of people on the weekends were surprisingly empty. I also noticed significantly less traffic, most notably on the freeways. What used to be bumper-to-bumper traffic on the 110 through downtown LA and on the 101 on a Friday or Saturday night was just a minimal slowdown, but otherwise smooth sailing.

    I was looking into apartments for rent and condos for sale in my old South Bay neighborhood, and noticed that condo prices aren’t much different than they were in 2006, and there were a heck of a lot of places for rent. Just for kicks I inquired about a rental in my old complex, and the rent was THE SAME as what I paid back in 2003!

    I had a discussion with a friend about where all these vacancies are coming from and where people are going; he suspects that it’s probably the educated working professional 20-30 year age group who lost their jobs and are moving back in with family. Or maybe young families leaving CA for other places that have a lower cost of living. Either way, it’s most likely directly related to unemployment/underemployment.

    1. wheresthebeef

      I live in the South Bay and completely agree with what you are saying regarding prices. Anything on the “affordable” (600K to 800K) end in the beach cities is nearing peak bubble pricing of 05/06. I looked at a townhouse this past weekend…South Redondo, 2 bed/2bath, 2 garage, small ocean view. Listed for 625K…agent had multiple offers after two days and expected it to sell for close to 700K. The Kool Aid here is still flowing like no tomorrow.

      1. Swiller

        I’m willing to bet it’s money from outside the country. The last 24 years I’ve lived in south OC, I’ve seen waves and waves of immigration. Most if not all that move to Irvine are very well educated and used to living in countries that make the boxes in Irvine look like a communist dream.
        If the trend holds, I look to property along the coast just skyrocketing. If you’re wealthy why wouldn’t you want to live here….strict pollution control, strict environmental laws, military equipped police force, Donald Bren’s eternal smile of development (until the hills run out, the oranges are already gone forever…LOL “orange” county…should be changed to “green” county). The only thing missing here is actual JOBS, and the wealthy don’t usually have a SALARY, they own companies and have minions do their work. Minions like us.
        I look to see the wealthy from other countries FLOCK to California regardless of the price.

  6. bltserv

    30 Years old. 917 Square Feet. Your going to be lucky to get $ 1400.00 a month for this dog.
    Positive cash flow is still a ways down the road.
    And rents are falling. My IAC complex is thinning out nicely these days. Plenty of parking this winter. That second leg down is going to just slam all the prices later this year. Good luck selling a depreciating asset in the coming market when interest rates get back to reality. This little place should be priced at about $ 200K

    1. IrvineSnob

      I was reading this blog for a long time and find it amazing that people still talking about fundamental values and housing prices drop.

      Guys, try to look at the problem from the other side: nobody in this country is interested in further housing prices drop: government wants to collect bigger taxes, owners want to see their equity grow. Only buyers want to see prices drop… However, once they buy a house, they immediately crossover to the dark side: ))) and become bullish. Isn’t this amazing?

      1. Planet Reality

        This blog made me believe in the housing fundamentals bible.
        I made a shrine with the following:

        $2300 rent X 160 = $368k

        $2500 rent X 160 = $400k

        $3000 rent X 160 = $480k

        Irvine, why have you forsaken me?

      2. newbie2008

        You have some valid points that the govt is supporting the housing prices and the home owning masses don’t what a further drop. The govt will through in as much money as the banksters demand, not what the people demand. Once the liability to transferred from the banks to the taxpayer via new GSE-backed and govt-backed mortgages, refinancing, and loan modifications, it will all hit the fan, and then the banksters will buy on the cheap with little liability for the bad loans.

        I have some rental properties for the last 20 years, but I don’t see them going up in rent nor in sale price until unemployment (U6) is below 10%. I’ve missed the time to sell. Since they are positive cash flow, I can wait it out. They are very non-liquid. With RE at least you can see it, but requires lots of work and money for their upkeep. This is especially true when vacant — added extra utilities cost and no revenue. I don’t see how many of OC apartment building with 20-30% vacancy rates will make it. Maybe a good to buy later, but I can’t afford to fed an 20% vacancy rate alligator for long.

Comments are closed.