HUD Secretary Shaun Donovan has announced a temporary policy that will expand access to Federal Housing Administration (FHA) mortgage insurance for the purchase of foreclosed homes. Donovan says the move will accelerate the sale of REO properties to turn vacant homes into occupied residences and help bring stability to home values in communities where foreclosure activity is high.

FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. But in today's foreclosure-ravaged marketplace, FHA research has shown that acquiring, rehabilitating, and reselling these properties often takes less than 90 days.

FHA Commissioner David H. Stevens said prohibiting the use of FHA mortgage insurance for a resale within 90 days of acquisition adversely prevents FHA borrowers - particularly first-time buyers who often opt for government-backed financing - from buying affordable, distressed properties. Sellers of such homes are usually unwilling to consider contracts from potential FHA buyers because they will incur holding costs and the risk of vandalism by allowing a property to sit vacant over the 90-day period.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales without a mandated waiting period. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities, HUD explained in a statement.

"As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers," said Donovan. "FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization."

Donovan stressed that the change in policy is temporary and will include strict conditions and guidelines to assure that predatory practices are not exploited.

The waiver will take effect on February 1, 2010 and is effective for one year, unless extended or withdrawn by the FHA commissioner. To protect FHA borrowers against predatory practices of "flipping," where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following conditions:

. All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.

. In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.

. The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

The temporary policy waiver is one of several steps HUD is taking to alleviate property vacancies and community blight. As DSNews.com reported last week, the federal agency has awarded another $2 billion in Neighborhood Stabilization Program (NSP) grants to local communities and nonprofit housing developers across the country to combat the effects of abandoned homes by turning foreclosed properties into affordable housing projects