HUD has issued a mortgagee letter stating that effective immediately, borrowers in default on their mortgage at the time of a short sale or pre-foreclosure sale will not be eligible for a new Federal Housing Administration (FHA) -insured mortgage for three years. Those lucky few who will be eligible for a new FHA-insured mortgage following a short sale are those who have been current on their mortgage and other installment debts at the time of the short sale of their previously owned property.
Now while the Obama administration is strongly pushing for homeowners and lenders to pursue short sales when loan modifications aren't viable, even to the extent of offering cash incentives for a short sale transaction under the Making Home Affordable program, HUD indicates they will consider a short sale by homeowners in default on their mortgage as a so-called "strategic default." Meaning...they assume the borrower went into default on purpose to get out of the obligation.
Now you may be wondering how I tie this into a boost to the rental property market segment. Well, in about July of 2007, I made a decision to launch the Property Management Division of Atlantic Realty, (http://www.atlanticrealty.net/) a company that up unto that point focused primarily on handling REO properties for lenders, based on a premise that when the sub-prime lending market completely disintegrated, those who previously got a loan by demonstrating a pulse would no longer be able to and would still need a roof over their heads. Those whom perhaps should have been tenants anyway would shortly be back in the rental market again. I also reasoned that with prices falling from unsustainable levels driven by this wild lending, many homeowners faced with the need to sell but being unable to without bringing truckloads of cash to the closing table would opt for renting their extra home(s) if even only as a temporary stop-gap of a year or two until the market value bounced back and permitted them to sell without taking a bath.
Two years later, I believe my assumptions were accurate, if not as pronounced as I would have expected because FHA and the federal government has stepped in to fill in where sub-prime left off. While crazy loans may be gone for ever, the vast majority of the REO sales we close are to buyers obtaining FHA loans and putting a minimal amount down while getting seller concessions on top. Even worse. the First Time $8,000 tax credit while driving demand, does what down payment assistance did in previous sub-prime years past...leave a buyer in a house without any skin in the game. I guess we shall have to wait to see the results of these actions 18 to 36 months from now.
The latest HUD position may re-focus investors as to value of rental properties and further envigorate the rental property market segment. More defaulting borrowers will be locked out of new FHA loans and be forced into tenancy. With prices low and rents stable, an investor can actually get a decent return in many markets and is truly needed so that there is a supply of available housing for the increasing number who are now unable to obtain mortgage financing.
The missing piece remaining to really fuel a rental investor comeback is financing in reasonable amounts. Many investors would like to build their rental portfolios but can't because the only have so much cash and most of the sources of investor loans, commercial banks, aren't making loans. Why should they when they can borrow from the FED at 0% and invest in the stock market.
In my opinion what needs to happen next is that FED borrow rates need to tick up so that banks actually have to get back into lending money to make money. Then, when investor financing is more prevalent and obtainable, we will see a continued emergence in demand for properties by mom and pop investors and a solution to the increasing number of former homeowners turned tenants.
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