Good news for re-haber investors

Investor Report: 203(K) Rehabilitation Program
by Kenneth R. Harney
Real estate investors could regain access to an important FHA financing program that's been closed to them since the late 1990s -- provided HUD goes along with a proposal submitted recently by the National Association of Realtors.

In a letter to HUD Secretary Steve Preston, NAR president Charles McMillan asked the department to rethink its decision to bar investors from the 203(K) rehabilitation program, under which FHA insures a combined home purchase and renovation mortgage based on the after-repairs valuation of the property.

McMillan said reopening 203(K) to investors could play a key role in disposing of large numbers of vacant foreclosed houses that have been damaged by vandals or prior occupants.

"Many foreclosed properties are severely damaged after they are vacated, making them difficult to sell," said McMillan. "Investors utilizing the 203(K) program could purchase dilapidated foreclosed properties for rehabilitation and conversion into rental units."

Amending 203(K) restrictions "will benefit neighborhoods across the country," he said, and give investors "access (to) credit that is unavailable (during) the current economic crisis."

McMillan suggested the change could be temporary -- ending with the expiration of HUD's "Hope for Homeowners" program, under which FHA refinances seriously delinquent mortgages.

HUD imposed a moratorium on investor participation in 203(K) in 1996 after a series of scandals involving the program - bogus repairs, straw buyers and other abuses by speculators.

In his letter to Preston, McMillan acknowledged those earlier problems, but said HUD's Inspector General had concluded that most of the abuses were connected with nonprofit groups and so-called "identity of interest" transactions.

McMillan proposed that both types of participation be prohibited under any limited return of investors to the 203(K) program.

Asked by RealtyTimes whether FHA might reopen the doors to investors, an official said that given the short time frame until the Obama team takes over at HUD - now barely a month - the agency is likely to leave the issue open for the next administration's consideration.

The good news here: The incoming nominee for HUD secretary, Shaun Donovan, knows the 203(K) program well, and has direct experience with preservation of housing stock. Since 2004, Donovan has headed New York City's department of housing preservation and development. Plus he served at FHA during part of the Clinton administration.

Donovan won't require months of education to get up to speed on FHA programs, and the department should have a baseline decision on possible investor participation in 203(K) sooner, rather than later.

Published: December 19, 2008