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RISMEDIA, Oct. 2, 2007-(MCT)-A low-cost Federal Housing Administration mortgage and a bargain-priced foreclosure in St. Paul seemed like the perfect combination for first-time buyer Damon Kelly, but an FHA rule aimed at preventing property flipping nearly derailed the sale.

That rule says that the FHA will not approve a mortgage on a property if titled ownership of that property has changed within 90 days prior to the signing of the purchase agreement.

Confusion about the true ownership of the house raised questions about whether Kelly’s house met those requirements and, just a couple of days before closing, Kelly was forced to extend the lease on his apartment an extra month. “It was quite confusing,” he said. “And extending our rent out another month didn’t help our pocketbooks.”

Officials at the Department of Housing and Urban Development in Washington say that they have no plans to modify the rule, which says that any resale of a property may not occur 90 days or fewer from the last sale to be eligible for FHA financing.

The problem is complicated by the somewhat opaque chain of ownership that is common with repossessions, the backlog of property records awaiting recording at county offices and the growing number of foreclosures on the market.

“A vacant house sitting empty serves only to depress the market values of surrounding homes and blight the community,” said Kris Wilson of Fairway Independent Mortgage in Bloomington. “FHA should be stepping up to the plate and saying, ‘How can we help?’ not ‘How can we obstruct this sale?'”

An amendment to that rule, called Mortgage Letter 2006-14, includes several exceptions to the 90-day restriction, including state and federally chartered financial institutions and government sponsored enterprises.

While the rule applies to all properties, it’s most likely to affect those buying foreclosures, which tend to be more complex than conventional mortgages. And how many borrowers it could impact is still unknown.

Wilson said that the rule fails to take into account the practical realities of financing foreclosure. That’s because most companies that are exempted from the 90-day rule end up transferring ownership of their listings to subsidiary companies and other entities that are not exempt.

Often those title transfers, which can happen several times before a property hits the market, don’t get recorded until shortly before a property is sold.

In Kelly’s case, for example, Wilson contacted Ramsey County and the listing agent to verify who owned the property and that no ownership changes had occurred within the past 90 days. She was assured by the listing agent that Countrywide Bank, which foreclosed on it this past November, was exempt from the rule and was the most recent owner.

He was wrong. The most recently listed owner was Countrywide Home Mortgage, which was not exempt under the FHA rule.

In the harried weeks leading up to the closing, the file revealed at least five possible owners, including the former owner, a relocation company, two mortgage companies and a limited liability company related to the relocation company.

“They were playing hot potato with the thing,” Wilson said. Once ownership was clarified through unfiled deeds and Wilson was able to determine that the deal did meet the FHA requirements, Kelly was eventually able to close on the loan, but only after extending his apartment lease.

“These people went to the wire not knowing if their loan would close because of this rule,” Wilson said. “And that put these borrowers in the position of not knowing if they were going to be on the street.”

Others risk a similar fate, Wilson said, adding that FHA-insured mortgages are well-suited to buyers of foreclosed and neglected properties. HUD’s Streamline 203K mortgage program, for example, lets buyers finance up to $35,000 in repairs before move-in.

Kelly’s situation also reflects the growing complexity of buying a foreclosure, and the struggles that loan officers can face while trying to obtain financing for those listings. Already, many loan officers don’t work with FHA programs because of their complexity. Those mortgages currently represent about 10% of all originations.

Because of this rule, Wilson said, “I can’t do FHA on foreclosures most of the time,” she said. “We can’t tell, practically speaking, whether a specific property is going to have this problem because there is no way of getting this info before you have title work done.”

The situation comes to the forefront at a time when HUD officials and mortgage lenders are trying to increase the availability and use of FHA loan products, which are attractive to investors at a time of tightening credit because they come with backing from HUD. As a result, FHA is often the lender of last resort for buyers who either don’t have credit scores or credit challenges.

Wilson wrote to officials at HUD’s homeownership center in Denver, but received a similar response to one offered by HUD spokesperson, Lemar Wooley: “Remember, this is only 90 days,” Wooley said. “And the rule is intended to address a form of predatory lending that victimizes home buyers by selling them property at an artificially inflated price, usually through the use of false statements and fraudulent documentation.”

But Wilson said that for a buyer waiting to move and a neighborhood living with the stigma of a boarded-up and vacant house, delaying a sale even a single day is too long.

“They’re saying that it’s OK to blight a community for 90 days,” Wilson said.

Copyright © 2007, Star Tribune, Minneapolis
Distributed by McClatchy-Tribune Information Services.