Investor Update
October 2, 2015

Proposed Rule.

Summary

This proposed rule would revise HUD’s regulations that address property disposition. This rule proposes to consolidate and reorganize HUD’s property disposition regulations so that they better reflect industry standards and allow HUD to conduct its Single Family Property Disposition Program more efficiently and more effectively so that HUD can obtain the greatest value for its real estate-owned (REO) properties in different market conditions.

Supplementary Information:

I. Background

Section 204(g) of the National Housing Act (12 U.S.C. 1710g) addresses the management and disposition of HUD-acquired single family property, which includes HUD-acquired real and personal property assets. HUD’s implementing regulations are codified in 24 CFR part 291 (currently entitled, “Disposition of HUD-Acquired Single Family Property”). Under these statutory and regulatory authorities, HUD is charged with carrying out a program of sales of HUD-acquired and owned properties along with appropriate credit terms and standards to be used in carrying out the program. Property owned by HUD as a result of acquisition includes REO. The goals of HUD’s Single Family Property Disposition program are to reduce the inventory of single family properties in a manner that minimizes losses to the Mutual Mortgage Insurance Fund, promote the expansion of homeownership opportunities for American families by, among other things, selling such properties at a discount to state and local governments and HUD-approved nonprofit entities, and help stabilize distressed communities.Show citation box

As a result of recent changes in the housing market, specifically the economic and housing crisis that commenced in 2008, HUD acquired an unprecedented number of REO properties—98,342, 90,943, 103,215 and 111,416 in FY 2010, FY 2011, FY 2012, and FY 2013 respectively. This increase caused FHA to reexamine its disposition strategy for HUD-acquired single family properties and determine that it needed to revise, consolidate and reorganize its property disposition regulations to facilitate the expeditious sale of REO properties acquired and provide greater efficiency in the administration of HUD’s property disposition program. While part 291 addresses both HUD-acquired real and personal property assets, the focus of this proposed rule is on HUD’s disposition of REO properties. FHA’s intent is to bring its practices into conformance with industry standards and allow HUD to conduct its Single Family Property Disposition Program more efficiently and more effectively so that it can obtain the greatest value for REO properties in different market conditions.

II. This Proposed Rule

The proposed amendments to part 291 would make several changes to the administration of HUD’s single-family property disposition program with respect to the disposition of REO properties. These changes seek to provide greater efficiency in the administration of HUD’s property disposition program for REO properties, align FHA’s regulatory authority with its business practices, and provide flexibility in anticipation of future changes to the property disposition program for REO properties. The following section of this preamble describes the changes to the property disposition process proposed by this rule.

1. Ownership and Disposition Authority. HUD proposes to revise the heading of part 291 from “Disposition of HUD-Acquired Single Family Property” to “Disposition of HUD-Acquired and Owned Single Family Property” to better reflect the fact that HUD not only receives REO properties, but also holds and maintains them throughout the disposition process. For similar reasons, the heading of § 291.100, which states HUD’s general policy on disposition, would be changed from “General policy” to “General policy on HUD acquisition, ownership, and disposition of real estate assets”. Under section 204(g) of the National Housing Act (12 U.S.C. 1710(g)), HUD is authorized to carry on activity necessary for receiving, owning, holding and maintaining property before selling it. Section 291.1(a), which states the purpose of part 291, would be amended to reference HUD’s authority to acquire and possess properties. This authority would also be cited in § 291.90 governing sales methods to reiterate HUD’s authority to prescribe methods of sale and dispose of properties.

2. Appraisal of HUD REO Properties. Section 291.100(b) of the proposed rule would be revised to clarify that the list price for HUD REO properties may be established utilizing one or more evaluation tools. When an appraisal is ordered as part of the process of establishing list price, the value must be established by an appraiser who meets the requirements in 24 CFR part 200, subpart G (Appraiser Roster), and who is in good standing on the appraiser roster established under that section. All methods used by appraisers must be consistent with FHA appraisal requirements at the time the appraisal is made. This change will align requirements for REO appraisers with requirements for appraisers found in part 200, subpart G, to ensure consistency. The proposed rule would expand the valuation methods available to include alternative methods commonly used in the real estate industry, such as Broker Price Opinions [1] and Automated Valuation Models. [2]

3. Escrow Amount Required for Properties Needing Repairs. Currently, buyers of HUD-acquired properties can qualify for FHA mortgage insurance even if the property does not meet FHA’s minimum property standards, provided that they put money into escrow to make necessary repairs to bring the property up to standard. As currently codified in § 291.100(c)(2), a property that requires no more than $5,000 for repairs may be offered for sale in an “as-is” condition if the purchaser establishes a cash escrow in the amount of $5,000. This amount has not been increased since 1994. Based on present value calculations with an escalation of 3.5 percent, HUD estimates that repairs costing $5,000 in 1994 would cost $10,000 in 2015. Therefore, the proposed rule would increase the maximum repair amount that would allow a purchaser to acquire property under § 291.100(d)(1)(ii) to $10,000. In addition, in order to ensure that HUD can keep this amount updated, this rule proposes to add a provision at § 291.100(d)(1)(ii)(B) that would allow HUD to increase or decrease this amount based on changes to the Consumer Price Index [3] by issuing a Federal Register notice for comment. After consideration of public comments received on the notice, HUD would then publish the revised escrow amounts in a Federal Register notice. Finally, the rule would revise §§ 291.100(c) and (d) to better reflect the distinction between FHA’s role in the property disposition process and FHA’s role as an insurer of qualified properties when they are sold.

4. Listings. The proposed rule would clarify that HUD has the statutory authority to allow for a number of listings options in § 291.100(h) that real estate brokers may use to list REO properties. In addition to asset management and listing contracts, this rule would provide that HUD may use other methods deemed to be appropriate. This will provide HUD with additional flexibility to expedite the sales process, thereby ensuring that properties are disposed of efficiently and at minimum cost to HUD. In addition, the proposed rule would revise § 291.100(h)(2)(ii) to require the purchaser’s broker to submit bids through HUD’s designated electronic bid system rather than through the exclusive broker.

5. Settlement Cost Assistance Available to Owner-Occupant Purchasers. Section 291.205(b) currently provides that, in the case of competitive sales, HUD, upon request by the purchaser, may elect to pay all or a portion of the financing and loan closing costs as well as the broker’s sales commission, not to exceed the percentage of the purchase price determined appropriate by the Secretary for the area. The proposed rule would remove HUD’s obligation to pay the broker’s sales commission and specify that settlement cost assistance is only available to owner-occupant purchasers and not available to investor purchasers. Both “owner-occupant purchaser” and “investor purchaser” are defined in § 291.5.

6. Bidding Process for Competitive Sales: The proposed rule would update the bidding process established under the competitive sales procedures in § 291.205. Section 291.205(k) would be revised to provide for winning bids to be made available publicly rather than making them available for inspection at a time and place designated by the HUD local office. Losing bids would no longer be made available either through electronic posting or through the HUD local office. In addition, the rule would specify that winning bidders may be notified by their brokers using electronic mail and that an executed sales contract will be deemed final when, after being signed by both parties, the executed contract is sent by email rather than via postal service delivery to the successful bidder.

7. Good Neighbor Next Door (GNND). The objective of the GNND program is to improve the quality of life in distressed urban communities by encouraging law enforcement officers, teachers, and firefighters/emergency medical technicians, whose daily responsibilities reflect a high level of public service commitment and represent a nexus to the needs of the community, to purchase and live in homes in these communities, as the preamble to that final rule made clear. (See 71 FR 64422, November 1, 2006.) As to law enforcement officers specifically, one of the purposes of the GNND Sales Program is to revitalize distressed communities by deterring the commission of crimes with the presence of law enforcement officers in these areas. (See 71 FR 64424.) However, the currently codified rule, while it requires teachers and firefighters in the GNND program to live in the areas they serve, does not do so with respect to police officers. Therefore, this rule would add this requirement for police officers in accordance with the purpose of the rule.

This proposed rule further clarifies that similar requirements apply to all of the GNND participants by making a parallel change to §§ 291.500, 291.525 and 291.530, which are the sections on purpose and purchaser qualifications, in general. This rule also adds a definition of “locality” to § 291.505, and uses that term in this proposed rule rather than “area,” which is the current terminology, to avoid repetitive language and confusion with the concept of a “revitalization area” used in codified § 291.510.

Technical Changes

This proposed rule would revise the structure of § 291.5 to consolidate the definition for “Secretary” with the other definitions in this section.

Source: Federal Register (Proposed HUD Rule full version)