The Latest Housing Fixes

mistakes

Apparently bereft of any other good ideas to deal with the foreclosure mess, the government has decided to return to the good old days in order to move inventory.

Today was the first day of FHA’s capitulation. House flippers no longer need worry about holding a property for 90 days before a buyer is eligible for FHA financing. Henceforth, anyone who wants to buy a house from someone who recently purchased it is free to do so and FHA will finance it assuming the borrower qualifies and the seller is not selling it for more than 20% more than he or she paid for it. Supposedly, this rule change is good only for a year and then the 90 day waiting period will be reimposed.

The only logic in all of this seems to be that eliminating the holding period will entice more investors into the foreclosure market and thus help sop up the existing inventory. Otherwise it flies in the face of conventional real estate logic. Even during the height of the boom underwriters remained wary of the quick flip and often wouldn’t buy off on sales prices substantially greater than the property garnered only a month or two before. Likewise, reputable appraisers are generally loathe to sign off on valuations when the seller has only owned the house for a short period.

If this made any ┬ásense then FHA would just have eliminated the 90 day holding period once and for all. The fact that they feel constrained to make it a temporary change would seem to indicate that they probably recognize it’s bad policy. It’s as if they are saying we know this probably puts the home buyer at risk but that’s a risk we’ll have to run in order to move the inventory and avoid further deterioration in home prices.

Not to be outdone, Fannie is offering 3.5% seller assistance on its inventory of foreclosures. The assistance can be used to cover closing costs. Put it together with first time buyer tax credit and you can literally move in with no money down and conceivably end up with some cash left over. For example, buy a $100,000 house, put down $5,000, have Fannie pay for your closing costs, collect your $8,000 credit and you’re $3,000 ahead of the game. Happy days are here again.

If you think all of this will go away as the foreclosure inventory starts to roll off, then I have several bridges in my portfolio you should bid on. The American consumer is no dummy. As I’ve written before, when they were told by the auto companies that zero percent financing was a one time offer, they simply went on a buyers strike when it disappeared and, naturally, the auto companies were back offering it within months. They will do the same with housing. Take away the sweetheart financing and they will sit on their hands certain in their knowledge that the government will cave under pressure from the realtors and home builders and roll out another program that repeats the mistakes of the past.

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