In January 2010 we saw that despite apparent declines in foreclosure filings, daily foreclosure activity is up on all fronts as the foreclosure stalemate continues.
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H.A.M.P. Updated Documentation Requirement Makes Good Sense
The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) announced this past Thursday an updated guideline for servicers participating in the Administration’s mortgage modification program commonly known as H.A.M.P. The rule change is intended to speed conversions of trial modifications to permanent ones by requiring documentation up front. “The updated process requires that key documents, including proof of income, be obtained from the borrower before a borrower evaluation can begin. This more robust requirement of upfront documentation will make it easier and quicker to convert trial modifications to permanent modifications and enable servicers to use their resources more effectively.” http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-021. The full text of Supplemental Directive 10-01, Home Affordable Modification Program – Program Update and Resolution of Active Trial Modifications, dated January 28, 2010 can be found at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd1001.pdf.
Before the new requirements, a trial period plan could be based on verbal financial information obtained from the borrower, subject to later verification during the trial period. Now for all trial period plans with effective dates on or after June 1, 2010, a servicer may evaluate a borrower for HAMP only after the servicer receives the following documents: (1) Request for Modification and Affidavit (RMA) Form; (2) IRS Form 4506-T or 4506T-EZ; and (3) Evidence of Income.
We previously pointed out that the lack of permanent loan modification conversions might be more the result of homeowner’s resisting a program that leaves them in yet another exotic mortgage. Not just a paperwork-processing problem as the Administration suggests. Regardless, homeowners will be better off with the “more robust requirement” because the homeowner will be less likely to make several mortgage payments under a trial modification only to be denied permanency due to disqualification caused by the documentation. In other words, it will be less likely that the homeowner will throw good money after bad on a mortgage that does not qualify for modification. Ostensibly, under the new requirements the homeowner’s qualifications can be better assessed before any modified mortgage payments are made in good faith by the homeowner during the trial period.
Whether the new documentation requirements really make it easier and quicker to convert trial modifications remains to be seen. An argument can be made that the new requirements don’t simplify the documentary complexities associated with H.A.M.P. but merely push the problem forward in the loan modification timeline so that the ultimate number of permanent loan modifications achieved will not change. But if nothing else, in many cases the homeowner and the servicer should know sooner if the sought after loan modification is destined for failure and that makes good sense.
I’m Flipping Over HUD’s Waiver of the Anti-Flipping Rule
On Friday, HUD Secretary Shaun Donovan announced that FHA mortgage insurance will 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. (See http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf for full text of the Waiver.)
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.