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FHA gives investors cold shoulder on foreclosed properties

Nonprofits and owner-occupant buyers will get priority

The Federal Housing Administration said that nonprofit organizations and owner-occupant buyers will have first dibs on foreclosed properties that get auctioned off through its Claims Without Conveyance of Title (CWCOT) program, specifically prioritizing these groups over investors.

For the first 30 days, a foreclosed property listed for sale can only be bid on by owner-occupant buyers, approved nonprofits, and government entities, the FHA announced last week. The administration added that these buyers would also enjoy an additional 60 days for conveyance from the date that the sales contract is ratified.

The FHA noted last Thursday that these changes — first announced by the Biden-Harris administration last year — will increase the supply of single-family homes available to families. Typically, FHA-insured foreclosed properties are snatched up by large investors and turned into rental properties.

The changes are effective immediately, but these provisions must be implemented for all post-foreclosure sales by early August (90 days from the date of the administration’s announcement).

Lopa Kolluri, principal deputy assistant secretary for housing, said in a statement that establishing exclusive listings for targeted buyers “is critical” in helping families achieve homeownership.

“This policy change is critical as the nation continues to address the challenges of a real estate market in which home prices are high and the availability of affordable housing supply is low, making it difficult for individuals and families to achieve the dream of homeownership,” Kolluri said.

In September 2021, the Department of Housing and Urban Development said that it hopes to ensure that at least 50% of these properties will be purchased by governmental entities, non-profits, and owner-occupant buyers.  

A post-foreclosure sale is a last-ditch effort for a lender to sell an FHA-insured foreclosed property to an independent third-party prior to conveying the property to the HUD. If sold to a third party, the HUD pays insurance benefits for losses to the lender.

Potential buyers are not privy to information about the condition of these properties prior to purchase. The administration said that the properties are sold in an “as is” condition and may include defects, possible health or safety hazards, or debris, or be located in a flood hazard area.

The program was designed to expedite the disposition of foreclosed-on properties and reduce the amount of time a property sits vacant. The FHA said the program is beneficial to lenders and the department because it reduces costs for both.

In the past couple of weeks, the administration announced a flurry of additional changes that will impact lenders and borrowers in the near future.

In mid- April, the FHA told mortgage servicers that they can now offer a 40-year loan term as a COVID-19 recovery option. For now, only borrowers financially impacted by the pandemic can opt for this loss mitigation option, and it may only be used in combination with a partial claim option. However, the administration is moving to make it a permanent fixture in its loss-mitigation handbook.

In early April, the FHA initiated a rule-making process to allow all borrowers with FHA-insured loans, regardless of whether they were financially impacted by the pandemic, to opt for a 40-year loan modification, if necessary.

The proposed rule would change repayment provisions for FHA borrowers, allowing lenders to recast a borrower’s total unpaid loan for an additional 120 months. HUD said that the implementation of such an option could prevent “several thousand borrowers a year from foreclosure.”

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