Mortgage bankers are trying to convince the Department of Housing and Urban Development to allow investors to utilize a government-insured program that finances property improvements. Rental properties had previously been banned from the program due to abuse by non-profit organizations, crooked lenders and other players.
Section 203(k) rehabilitation loans are insured by the Federal Housing Administration. The program enables the rehabilitation and repair of single-family properties.
But a moratorium on the program prohibits use of 203(k) loans for rental properties and properties used as short-term investments.
“The moratorium was put in place because of serious waste, fraud and abuse to the program perpetrated by unscrupulous nonprofit organizations, dishonest lenders and others in the mortgage industry in the mid-1990s,” the Mortgage Bankers Association wrote in a letter Tuesday to Federal Housing Commissioner Carol Galante. “The Office of the Inspector General at the Department of Housing and Urban Development identified significant risks, vulnerabilities and program weaknesses that necessitated a prohibition against investor participation, including individual and non-profit borrowers.”
But permanent changes to the program and improved industry controls warrant a lifting of the moratorium, according to the trade group.
Among changes since the moratorium was enacted is the funding of the program. FHA 203(k) loans were previously funded through appropriations. Now, the program is paid for through mortgage insurance premiums.
In addition, the quality of the appraisal process has increased and FHA now conducts post-endorsement technical reviews of the loans.
The Washington, D.C.-based association proposes that non-profit borrowers be excluded from the program. In addition, the number of 203(k) loans per borrower should be limited, and higher mortgage insurance premiums should be charged for investor loans.
In all, MBA addressed 13 concerns in its letter that were previously identified by HUD’s OIG and the Government Accountability Office.
MBA says that letting investors participate in the program would help communities by reducing the number of real-estate-owned properties, and — in the process — stabilize home prices, reduce the number of vacant properties and increase the supply of affordable housing. It would also create job opportunities.
“MBA believes that all REO properties should be eligible for the program; however, we would also support a phase-in approach that would begin with only FHA properties being eligible for the program,” the letter stated.
