Effective immediately, the Federal Housing Administration (FHA) has implemented yet another program to market foreclosed homes, this one called the Neighborhood Stabilization Program (NSP). NSP will sell Department of Housing and Urban Development (HUD) foreclosed homes under the FHA’s First Look Sales Method, which grants first option and financing to purchase HUD foreclosed homes to state and local governments as well as NSP participating nonprofit organizations.

Pulling from the FHA’s excessive inventory of foreclosed properties, NSP participants have an exclusive 14-day option after HUD/FHA acquires title to purchase these properties at a discount of 10% on the property’s appraised value. Property not purchased during the 14 days will be listed and sold to the general public according to standard procedures.

NSP participants may use the NSP funds to finance the purchase of homes for use as rentals or homeownership.

first tuesday take: The reason the FHA can offer a 10% discount is because they are circumventing the multiple listing service (MLS) path to homeownership and thus eliminating broker fees, closing costs and financing costs. Brokers and agents are deliberately deprived of the ability to market these foreclosed homes to homebuyers.

For the FHA, the more deep-rooted issue is they have more homes than brokers have homebuyers at the prices FHA expects to get from these properties. With an insufficient number of homebuyers to absorb the excess inventory, it is advantageous for FHA to sell them to communities who will buy and maintain the properties and take the risk of reselling them to homebuyers in the future.

California’s Central Valley region may find the purchase of FHA foreclosures by local agencies beneficial to their communities, but it will be for reasons which appear transitory. Homebuyers must eventually acquire these homes and that will require jobs.

Jobs in FHA foreclosure areas will trickle in very slowly. Worse yet, those with jobs in urban cities no longer need to travel to these outlying areas since cheap properties have become available closer to their current employment. Thus, FHA suburban properties will most likely be resold at a loss for the communities that buy them.

There is a reason the FHA is now doing a landslide business in foreclosures in the remote suburban areas, such as the central valleys. In the late 1990s through 2006, FHA permitted builders (and some MLS sellers) to advance the minimum 3.5% downpayment to marginal buyers on the least expensive homes in the state, in violation of specific FHA regulations against this Nehemiah financing. FHA-insured mortgage foreclosures in California are most often located in inland areas [For more information on Nehemiah financing, see the October 2008 first tuesday article, HR3221: The Unfortunate Housing Act of 2008.]

Yet without rational consideration, community activists will push the local politicians in remote suburbia to take the NSP financing and purchase these homes with the laudable goal of cleaning up the community. [For more on First Look programs, see January 2010 first tuesday article, Fannie Mae reveals owner-occupant preferential program.]

In the mid-‘90s, remotely located communities had both unused housing and no industries to create jobs similar to conditions that currently exist. What resulted in some of these communities (and could happen again) was an influx of welfare recipients who rented the vacant properties at far lower rates than they were paying in the inner cities. Thus, they acquired better living conditions and their welfare funds went further.

One alternative is to demolish the excess housing — which would most likely offend taxpayers. Another alternative is for the FHA to put their foreclosures on the MLS market and take whatever the homebuyers and investors are willing to pay. This will keep government out of residential real estate ownership, and will not, as with NSP, simply shift ownership from federal to local governments with one financing the other.

Re: “FHA announces First Look Initiative to help communities stabilize neighborhoods hard hit by foreclosure” from the U.S. Department of Housing and Urban Development