Blockchain and Financial Services Blog

FHA Lifts Limits on Insurance for Foreclosed Homes

In an effort to stabilize declining home values in certain neighborhoods, the U.S. Federal Housing Administration (FHA) announced a temporary policy that will extend government-backed mortgage insurance and allow for the immediate sale of vacant foreclosed properties.

For one year, the FHA will insure foreclosed properties marketed and sold by property disposition firms on behalf of lenders. The properties, which must be purchased by owner-occupants, will no longer be subject to a 90-day waiting period.

Assistant Secretary of Housing-Federal Housing Commissioner Brian D. Montgomery explained: “The action we take today will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes in neighborhoods across the country.”

The FHA previously prohibited insuring a mortgage on a home owned by the seller for less than 90 days. This prohibition was intended to prevent property "flipping," a predatory practice of buying distressed homes and quickly reselling them at an inflated price to an unsuspecting buyer.

The FHA's new policy is meant to stabilize neighborhoods experiencing high rates of foreclosure. Many foreclosed properties in distressed neighborhoods remain vacant for months, delaying maintenance and repairs and inviting vandalism. To address this problem, lenders have hired companies that specialize in the marketing and disposition of foreclosed homes. The FHA’s move will allow these companies to sell the properties to borrowers using FHA financing.

The new policy will certainly help, but the impact may not be as dramatic as advertised. The FHA still requires that homes purchased with FHA backed loans be in move-in condition. As a result, many lenders still won't be able to resell their foreclosed homes until they make the repairs needed to bring them up to FHA standards. It remains to be seen whether lenders will be willing to make the repairs necessary to qualify for FHA insurance.

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Vincent E. Mauer represents clients in commercial and business disputes with particular emphasis on financial institutions and instruments, including financial institution bonds, securities, insurance policies and commercial loans.