Thanks to all of the fraudalent activity by consumers who have decided to walk away from their highly leveraged homes then purchase a new home using an FHA loan, HUD has changed their underwriting guidelines regarding rental income for recently vacated properties. Basically, HUD will not consider using rental income from a recently vacated property. Unfortunately, the dishonest acts of others will have negative consequences for those who may actually need to re-locate.
Why? Because homeowners are walking away from their current home which may be upside down regarding what they owe, then purchasing a new home at the reduced market price across the street at the current reduced market value. The consumer then stops making payments on their recently vacated home, and lets it go into foreclosure. This is only exacerbating the current market unrest by adding another foreclosure to the market. By claiming the rental income of their old property, this aids a buyer to hopscotch from an over-leveraged home to a similar home with a lesser mortgage.
I would guess many of the same folks who speculated, took negam arms, and the like are the ones screwing over the system once again.
Michael Byrne
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Michael Byrne
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The NegAm exodus continues MIchael, however at the expense of the more integrity minded members of the community, both on the consumer end of things, and the lender side as well. Nice post. Hope your having a fine week.
There was a hiccup in the housing market in the late 80's/early 90's in North NJ, but people stayed in their homes, and eventually the homes appreciated.
Sub Prime and other anomalies said boo, though Michael, and stopped the hiccups. I wonder if the market will stay the course over the next twelve months? It's scary....
I know. This is crazy..however they do have an exception for relos
This is the actual memo
September 19, 2008
MORTGAGEE LETTER 2008-25
TO: ALL APPROVED MORTGAGEES
SUBJECT: Converting Existing Homes to Rentals-Underwriting Instructions
Through this Mortgagee Letter, the Federal Housing Administration (FHA) takes steps to immediately respond to an unscrupulous practice arising in the housing mortgage market that poses a risk to FHA, FHA-approved lenders, and consequently to FHA's ability to help new homeowners.
Recently, FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence. This has been occurring as some homeowners, given the rising price of fuel, are relocating to homes nearer their employment, or are taking advantage of other home buying opportunities arising in the marketplace.
Due to FHA's concern that some homebuyers in these transactions may attempt to provide misleading information regarding the rental income of the property being vacated to qualify for the new mortgage, FHA is instituting underwriting guidance designed to assure that the homebuyer can make payments on the full debt service of both mortgages. Consequently, beginning with case number assignments on or after the date of this Mortgagee Letter and until further notice, the underwriting analysis may not consider any rental income from the property being vacated except under circumstances described in this Mortgagee Letter. The exclusion of rental income from property being vacated is being instituted on a temporary basis while FHA further analyzes this situation to determine whether permanent measures may need to be taken. This will assure that a homeowner either has sufficient income to make both mortgage payments without any rental income or has an equity position not likely to result in defaulting on the mortgage on the property being vacated. In either case, this guidance is directed to preventing the practice known as "buy and bail" where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage. Although the property being vacated will not have a mortgage insured by FHA, surrounding properties may and, thus, FHA may be indirectly negatively affected should that property result in a foreclosure.
Exceptions:
Rental income on the property being vacated, reduced by the appropriate vacancy factor as determined by the jurisdictional FHA Homeownership Center (see http://www.hud.gov/offices/hsg/sfh/ref/sfh2-21u.cfm) may be considered in the underwriting analysis under the following circumstances:
•· Relocations: The homebuyer is relocating with a new employer, or being transferred by the current employer to an area not within reasonable and locally recognized commuting distance. A properly executed lease agreement (i.e., a lease signed by the homebuyer and the lessee) of at least one year's duration after the loan is closed is required. FHA recommends that underwriters also obtain evidence of the security deposit and/or evidence the first month's rent was paid to the homeowner.
•· Sufficient Equity in Vacated Property: The homebuyer has a loan-to-value ratio of 75 percent or less, as determined by either a current (no more than six months old) residential appraisal or by comparing the unpaid principal balance to the original sales price of the property. The appraisal, in addition to using forms Fannie Mae1004/Freddie Mac 70, may be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055, and for condominium units, form Fannie Mae1075/Freddie Mac 466.
The guidance in this Mortgagee Letter applies solely to a principal residence being vacated in favor of another principal residence. This Mortgagee Letter is not applicable to existing rental properties disclosed on the loan application and confirmed by tax returns (Schedule E of form IRS 1040).
It is important to note that if the property being vacated had a mortgage insured by FHA, eligibility for a second FHA insured mortgage can only occur under the exemptions described in handbook HUD-4155.1 REV-5, paragraph 1-2.
If you have any questions regarding this Mortgagee Letter, call 1-800-CALLFHA.
Sincerely,
Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner
Some people have no principles and just do whatever they think is good for themselves. Too bad the government sometimes enables this type of behavior. Thanks for writing. Bonnie
Michael, Thanks for posting this article. We are all affected by the "personal decisions". Most people are inconsiderate of the affect of their actions on others.
In the case of a borrower having rental property, lenders will not lend if a borrower is upside down (negative equity) on any home they have that carries a mortgage.
I've also personally heard brokers counsel their buyers to buy and bail. Ethics are not a part of their business model.
Real estate brokers advised people to buy and bail? Never heard that one.