Back in August, I wrote that the Federal Housing Finance Agency (government conservator of Fannie and Freddie) was seeking suggestions from the private sector about how to draw down the foreclosure inventory owned by Fannie and Freddie to help stabilize the real estate market. Limited information is now being released about the plan the two government behemoths will follow.

More Big Government for Big Business

The FHFA says more than 4,000 responses were received. Still, the one comment that stands out in the FHFA news release is that several respondents “demonstrated their technical and financial capability to engage in large-scale transactions” with Fannie, Freddie and FHFA.

The basic plan emerging involves:

• Requiring investors to rent the properties for a still to be determined period of time that is expected to be multi year.
• For Fannie and Freddie to either provide direct financing to investors or guarantee loans from banks and financial institutions.
• Required rehabbing of the properties to government specifications.
• Encourage big banks with large foreclosure holdings to aggressively enter the rental market as landlords.
• Provide on going government oversight of each house even after the rental period ends and it is sold to an end buyer.

The news release also states, “Only a few market participants have developed the necessary infrastructure and capabilities to manage dispersed single-family rental properties. With assurance of a continued flow of new REOs, respondents suggested additional firms will make the necessary investment and develop that capability.”

What is clearly missing is any support for small businesses to participate in the program. Fannie and Freddie currently have approximately 200,000 foreclosures on their books. When the banks are included, the number jumps to about 500,000. Additionally, another 3.4 million houses are expected to be foreclosed in the next couple of years. How this FHFA program plays out will have ripple affects on big and small real estate investors everywhere and a Tsunami affect in the hardest hit regions.

The FHA long held the belief that unscrupulous real estate flippers prey on unsuspecting borrowers when they flip houses appears to be changing. Interestingly, the FHA now thinks flipping houses is a good way to revitalize neighborhoods plagued with foreclosures. The government works is mysterious – or at least unexplainable – ways. Any way here’s what it means to real estate investors….

Before February 2010, the FHA refused to guarantee loans when a house had previously been sold less than 90 days prior to the FHA guaranteed sale. If a flipper sold to someone using a FHA guaranteed loan, he or she had to “season” the original purchase at least 90 days. This incurs unnecessary holding cost. In February 2010, the FHA first waived this rule and renewed the waiver in 2011. It was due to expired this January before the FHA again waived it through 2012.

According to Acting Federal Housing Administration Commissioner Carol Galante, “This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight.”

It’s Not a Flipping Free For All

Like all government policies, there are strings attached. First, the transaction must be arms length. There cannot be a link between the buyer and the seller. Another restriction applies if the selling price is 20% or more than the buying price less than 90 days prior. The policy doesn’t prohibit a 20% higher selling price but it must be documented why the resell price is above 20%.

Here are some ways the FHA suggests that the lender ensure it’s an arm length deal:

• The seller holds title to the property.
• Limited liability companies, corporations, or trusts that are serving as sellers were established and are operated in accordance with applicable state and federal law.
• No pattern of previous flipping activity exists for the property such as multiple title transfers within a 12 month time frame (chain of title information for the subject property can be found in the appraisal report).
• The property was marketed openly and fairly, through a multiple listing service (MLS), auction, for sale by owner offering, or developer marketing (any sales contracts that refer to an ‘‘assignment of contract of sale,’’ which represents a special arrangement between seller and buyer may be a red flag).