HUD Waiving the Anti-Flipping Rule

FHA mortgage insurance will now be allowed on foreclosed properties that are quickly resold or “flipped.” The policy shift is a welcomed change. The Anti-Flipping Rule adopted in 2003 as 24 CFR 203.37a(b)(2) was designed to address predatory lending practices where a Lender, Seller and/or Appraiser might perpetrate fraud on an unwitting homebuyer by reselling a property far in excess of the fair market value or with substantial overcharges tied to the new mortgage. While the Rule may have helped on that front, it unnecessarily targeted foreclosures which are commonly flipped… either by the bank or an investor.

Typically, in today’s foreclosure environment an investor will purchase a foreclosed home at the Trustee’s Sale only when the property can be bought at a discount from the fair market value. The home is then rehabbed as necessary and resold at fair market value as quickly as possible to avoid holding costs and risks incident to ownership, often the resale occurs well within 90 days. Importantly, the notion of a fraudulent sale in excess of fair market value to an unwitting homebuyer does not arise nor is it a threat. Instead, the reality in today’s market is that an investor will not entertain a purchase offer from a buyer who requires FHA financing which is bad for the buyer, bad for the seller and bad for the community seeking to stabilize property values at full fair market. Kudos to HUD for finally recognizing this negative influence in the housing market and doing something about it.

The waiver will take effect on February 1, 2010 for one year unless otherwise extended or withdrawn. Also, note that the waiver comes with the following limitations:

The transaction must be at arms-length

If the sales price is 20% or more above the acquisition cost the lender must meet conditions concerning appraisal and property inspection

The waiver is limited to forward mortgages, no Home Equity Conversion Mortgages

Interestingly, HUD acknowledged that eliminating the 90-day resale restriction will give the FHA greater opportunity to dispose of it’s single family REO “in a way that maximizes return to the FHA mortgage insurance fund” (in other words at the highest price). So HUD saw that the Anti-Flipping Rule not only hurt buyers, sellers and our communities, but hurt the FHA too.


The waiver is good in that it helps investors quickly resell foreclosed properties at full fair market price which will also help occupy homes and stabilize values. The waiver is good in that it makes available to buyers FHA-insured mortgage financing on a growing portion of the available homes for sale. The waiver is good in that it helps mitigate potential FHA mortgage insurance fund loses by increasing what buyers may be willing to pay for distressed properties. Bottom line, it’s all good.

Key West is a Song

Natl December home sales down nearly 17 percent

Sales of previously occupied homes took the largest monthly drop in more than 40 years last month, sinking more dramatically than expected after lawmakers gave buyers additional time to use a tax credit.

Buyers stopped scrambling to qualify for a tax credit of up to $8,000 for first-time homeowners. It had been due to expire on Nov. 30. But Congress extended the deadline until April 30 and expanded it with a new $6,500 credit for existing homeowners who move.

December's sales fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million, from an unchanged pace of 6.54 million in November, the National Association of Realtors said today. Sales had been expected to fall by about 10 percent, according to economists surveyed by Thomson Reuters.

The report "places a large question mark over whether the recovery can be sustained when the extended tax credit expires," wrote Paul Dales, U.S. economist with Capital Economics.

The median sales price was $178,300, up 1.5 percent from a year earlier and the first yearly gain since August 2007. However, some of that increase could be due to a drop-off in purchases from first-time buyers who tend to buy less expensive homes.

Sales are now up 21 percent from the bottom a year ago, but down 25 percent from the peak more than four years ago.

The big question hanging over the housing market this spring is whether a tentative recovery will stumble after the government pulls back support. The Federal Reserve's $1.25 trillion program to push down mortgage rates is scheduled to expire at the end of March -- a month before the newly extended tax credit runs out.

Last year, first-time buyers were the main driver of the housing market, but their presence is on the decline. They accounted for 43 percent of purchases in December, down from about half in November, the Realtors group said.

The inventory of unsold homes on the market fell about 7 percent to 3.3 million. That's a 7.2 month supply at the current sales pace, close to a healthy level of about 6 months.

Total sales for 2009 closed out the year at 5.16 million, up about 5 percent from a year earlier. That was the first annual sales gain since 2005. But prices fell dramatically last year, declining 12.4 percent to a median of $173,500, the largest decline since the Great Depression.

Though the results missed Wall Street's expectations, the Realtors' group says there are signs the market is finally stabilizing.

"There is some sustainable momentum building in the housing market right now," said Lawrence Yun, the group's chief economist. However, he cautioned that the recovery will depend on whether the economy starts adding jobs in the second half of the year.

Many experts project home prices, which started to rise last summer, will fall again over the winter. That's because foreclosures make up a larger proportion of sales during the winter months, when fewer sellers choose to put their homes on the market.

Despite fears that home prices are starting to fall again, some analysts still believe the worst is over.

"We do not believe it is fair to consider this a double dip in the housing market," Michelle Meyer, an economist with Barclays Capital, wrote last week. "The recovery is still under way, but hitting some bumps in the road.

Strategic Defaults

Nearly a year after the Obama administration unveiled its ambitious housing rescue program, foreclosure tallies continue to break records. Foreclosure filings were reported on more than 2.8 million properties in 2009, up 21 percent from the previous year and 120 percent from 2007. With nearly 10 percent of mortgages now delinquent--which is also a new record--even more homeowners appear headed for foreclosure this year. A massive supply of delinquent loans continues to loom over the housing market.

Homeowners have found themselves in foreclosure for a number of reasons. Some purchased properties they could never really afford. Others lost their jobs--the national unemployment rate remains in the double digits--and had no way to make mortgage payments. But as the crisis rumbles forward, an additional driver of home foreclosures has become clear: Many borrowers have the means to keep paying the mortgage but are simply walking away because they believe it's best for their finances.

The number of so called "strategic defaults" more than doubled, to 588,000, from 2007 to 2008, according to a study by Experian and Oliver Wyman. A separate 2009 survey found that more than a quarter of all existing defaults were strategic. Meanwhile, a growing number of academics are touting the financial benefits of walking away. "Homeowners should be walking away in droves," Brent T. White, a University of Arizona law school professor, said in a recent paper. "The financial costs of foreclosure, while not insignificant, are minimal compared to the financial benefit of strategic default."

The case for strategically defaulting is linked to negative equity, or owing more on your home than it is worth. With home prices at the national level having dropped roughly 30 percent from their 2006 peaks--and a great deal more in certain bubble markets--a considerable chunk of property owners are now in this fix. Nearly 1 in 4 borrowers currently have negative equity, according to First American CoreLogic. And rather than continuing to make payments on an investment that's now worth significantly less than what they paid for it, many borrowers are throwing in the towel.

White uses the following example to demonstrate how many borrowers are better off defaulting: A young professional couple with two children pays $585,000 for a three-bedroom, Salinas, Calif.-home in January 2006. At $4,300, monthly payments on their no-money-down, 30-year fixed mortgage with an interest rate of 6.5 percent represent a tad less than 31 percent of their gross monthly income. Toss in taxes, student loans, health care, food, and other essentials, and finances quickly get tight.

After the historic housing bust, their home is now worth $187,000, but they still owe $560,000. Other homes in their neighborhood, of course, have plummeted in value as well. And if the couple was to purchase a similar, nearby house listed at $179,000, their monthly payments would be less than $1,200. That's a huge savings over their current $4,300 monthly mortgage bill. But since a foreclosure on their credit report is likely to prevent them from buying a home in the near-term, they may have to rent. And about $1,000 a month gets them a comparable rental property in their neighborhood.

"Assuming they intend to stay in their home ten years, [the homeowners] would save approximately $340,000 by walking away, including a monthly savings of at least $1,700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction," White writes. "If they stay in their home, on the other hand, it will take [the homeowners] over 60 years just to recover their equity--assuming, of course, that they live that long."

The argument against strategically defaulting is much more straightforward: You promised to repay the loan when you took out the mortgage, and it's your responsibility to do everything possible to honor that commitment. Avoiding the guilt and shame that can accompany a foreclosure is one of the top reasons struggling homeowners don't strategically default, White writes. On top of that, a foreclosure significantly damages one's credit--making it difficult, if not impossible, to obtain a mortgage for years afterward.

But in a recent white paper, Alex Edmans, an assistant professor of finance at The Wharton School of the University of Pennsylvania, argues that many homeowners are ignoring these consequences to do what they believe is in their best financial interest. "Defaulting on their loan is a rational decision: While they forfeit their home, they rid themselves of a mortgage liability of even greater value," Edmans writes. "The source of the problem is the homeowner's balance sheet: since he has negative equity in his home, it is not worth keeping it by paying the mortgage."

The issue of negative equity triggering strategic defaults represents a nasty headache for the Obama administration. The $75 billion mortgage housing rescue the administration unveiled last February is designed to keep people in their homes by reducing their monthly mortgage payments down to more manageable levels. The plan does not, however, require lenders or servicers to reduce borrowers' mortgage principal--meaning underwater borrowers still have this incentive to walk away from their home loan.

Laurie Goodman, a senior managing director at Amherst Securities Group, considers negative equity to be the housing market's greatest challenge and believes current housing rescue efforts are insufficient. "The current modification program does not address negative equity, and is therefore destined to fail," Goodman said in written testimony before a Congressional committee in December. "It must be amended to explicitly address this problem."

Although Uncle Sam has reduced mortgage payments for more than 850,000 borrowers so far--for a median savings of more than $500--the government will remain under pressure to take more aggressive action as long as the foreclosure epidemic keeps churning. Mark Zandi, the chief economist at Moody's Economy.com, believes the government may take steps to tackle the issue of negative equity head-on this year by incorporating principal write downs--which reduce a borrower's negative equity position--into the housing rescue program.

Economy Moving Sideways at Best

click on graph for larger size

This graph shows that the National Association of Home Builder's Housing Market Index (HMI) and single family starts mostly move in the same direction.

Residential investment (RI) is one of the best leading indicators for the economy, and the best indicators for RI are the NAHB HMI, housing starts, and new home sales. And these indicators are moving sideways (at best).

Note: The largest components of residential investment are new home construction, and home improvement. This includes brokers' commissions and some minor categories.

2009 Record Foreclosures & More in 2010

A record 2.8 million households were threatened with foreclosure last year, and that number is expected to rise this year as more unemployed and cash-strapped homeowners fall behind on their mortgages. The number of households that received a foreclosure-related notice rose 21 percent from 2008, RealtyTrac Inc. reported Thursday. One in 45 homes were sent a filing, which includes default notices, scheduled foreclosure auctions and bank repossessions. In December, more than 349,000 households, or one in 366 homes, were hit with a foreclosure-related notice. That represents a 14 percent spike from November and a 15 percent jump from December 2008.

Banks repossessed more than 92,000 homes, up 19 percent from November. That increase was likely due to lenders working to clear their books at the end of the year.

Stemming the tide of foreclosures is an important step for the real estate market and the economy to recover. Because foreclosures are usually sold at heavy discounts they can lower the value of surrounding properties. Cities lose property tax dollars from empty foreclosures and declining home values, straining local economies. Home prices have stabilized in some cities, but are still down 30 percent nationally from mid-2006.

The foreclosure crisis isn’t letting up. Between 3 and 3.5 million homes are expected to enter some phase of foreclosure this year.  High foreclosures forced the federal government and several states to come up with plans to prevent or delay foreclosures to help troubled borrowers.

One plan intended to help homeowners is the Obama administration’s loan modification program known as Making Home Affordable. Lenders participating in the program have offered trial loan modifications to 760,000 eligible borrowers since it was launched in March. A loan modification changes the terms of the loan, such as lowering the interest rate, to make the monthly payments more affordable.  As of November, just 31,000 of them had been made permanent. Nearly the same number had dropped out of the program or found to be ineligible. The Treasury Department will release updated figures Friday.

Economic issues, such as unemployment or reduced income, are expected to be the main catalysts for foreclosures this year. Homeowners with good credit who took out conventional, fixed-rate loans are the fastest growing group of foreclosures.  The Mortgage Bankers Association on Wednesday recommended changes to the government’s program to account for borrowers who’ve lost their jobs. The program, for example, should include a suspension of payments as the first step for borrowers with a temporary loss of income.  The government also should refrain from “endless incremental program changes,” the trade association said.  Since April 2009, there have been nine instances where new program requirements were released, and more than 90 clarifications for new or revised forms, reporting changes and policies. The changes forced mortgage companies to implement new procedures and retrain employees, taking away time that could be spent helping borrowers.

The same three states that led the nation in foreclosure rate in December also posted the highest rates for the entire year: Nevada, Arizona and Florida. More than 10 percent of Nevada housing units received at least one foreclosure filing in 2009, with Florida and Arizona following with about 6 percent each.  The other states ranked in the top 10 for the year were California, Utah, Idaho, Georgia, Michigan, Illinois and Colorado.

Miami, Key West Shatter Cold Temp Records

Ok,ok that's not really an iceberg floating off Key West, but it sure feels that cold to some here.

Monday morning will go down in the record books for one of the coldest days in South Florida's history.

In Miami, the temperature dropped to 36 degrees, breaking the old record for the day of 37 degrees set back in 1927. Across South Florida actual temperatures dropped into the upper 20s inland in some locations, including Kendall, with the 'feels like' temperatures in the teens.

But that wasn't the only record broken.

In Key West, the temperature at the airport dropped to 42 degrees shattering the old record of 48 degrees set back in 1970. This was also the second coldest temperature ever recorded in Key West going back to 1873 when weather records for the island were first kept. The all time record low in Key West is 41 degrees which has only occurred twice; on January 13th, 1981 and January 12th, 1886.

Temperatures will slowly but surely increase the next few days. Tuesday and Wednesday forecasting highs in the 60s and finally enjoying highs back to normal in the 70s by Thursday and Friday with a better chance of showers by the end of the week. Saturday will be warmer with highs in the 80s.