Discrepancies in Real Estate Arm’s Length Laws a Concern for FHA

The Federal Housing Administration is working on finding a solution to discrepancies in state laws regarding arm’s length transactions, but the agency says lenders should defer to state policy for the time being. 

“FHA is aware of concerns that the laws in certain states may conflict with its arm’s length transaction requirements for preforeclosure/short sales,” a memo states. “FHA is in the process of issuing guidance to specifically address the intersection between its policies and applicable state laws on this requirement.”

The memo continues, “Until such guidance is issued, mortgagees are reminded of their ability to seek guidance and assistance in complying with both FHA requirements and any applicable state laws from FHA’s National Servicing Center.”

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In 2011, HUD published Mortgagee Letter 2011-16 to rescind guidance issued in 2008 to clarify its non-recourse policy on reverse mortgages insured by the FHA. In 2013, language for counselors and lenders was updated officially, stating that reverse mortgage loans are non-recourse, meaning that a borrower and his or her heirs or estate will only be responsible for repaying 95% of the appraised home value, rather than the loan balance if that balance is greater than the home’s worth at the time of sale.

Previously, HUD’s handbook incorrectly stated that if the heirs or the estate wished to keep the property, they would be personally liable for the full balance of the loan. 

Access the recent memo. 

Written by Emily Study

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