Word is out.  HUD is lifting it’s prohibiting against buyers using FHA loans to buy a property recently “flipped” by an investor.  This should be great news, and I fielded a number of phone calls over the weekend from clients and agents rejoicing (way prematurely) in the change.

But not so fast on….

Although HUD has indicated a change in their guidelines, they only insure FHA loans.  Some investor still has to buy them.  So what about those investors; are they on board? I put an email out over the weekend to find out and also talked today with a mortgage banking insider.  As I suspected, the “investors” are not buying, HUD guarantee or not.

This sentiment is the same one that has caused investors to apply HUD’s anti-flip rule to conventional and VA loans, even though Fannie, Freddie, and VA have no such prohibition.  Statistically, there is still a very level of mortgage fraud associated with flipped properties.  Without a large pool of investors for mortgages securities (remember the U.S. government is still nearly the only buyer), there is no tolerance for anything risky.

This could change, so of course I’ll be keeping an ear to the rail for any good news.  Stayed tuned.  While it’s a shame that capital cannot make its way to the market of distressed homes (individual investors could certainly fulfill a competitive market function by buying, fixing, and selling damaged properties), it is the lack of market demand itself that is inhibiting the process.

In keeping with a general tightening of it’s lending rules to compensate for elevated default rates, HUD has announced an increase in the “up-front” mortgage insurance (MI) for FHA loans from 1.75% to 2.25%. As you know, mortgage insurance on FHA loans is normal split into two parts.  One portion is added to the monthly payment, and the other is added to the loan amount.  Allowing buyers to finance a portion of the MI has the effect of keeping payments lower than they otherwise would be on a similar conventional loan.

While the increase has some people concerned, let’s take a second and put things in perspective.  On a $200,000 loan, the financed portion of the MI increases from $3378 to $4343, so your loan balance grows by less than $1,000.  The resulting increase in the monthly payment (I’m using a 5% interest rate) is less than $5.

However, if you’re buying up to the $417k limit and the payment increase is critical, then you’ll want to be in Contract on a home by April 4, 2010, and make sure your lender has pulled your FHA case number before April 5th when the new rule goes into effect.