Loan Modification

FHA anti-flipping rule likely to remain suspended

By Peter G. Miller

For a number of years HUD has maintain an anti-flipping rule designed to prevent the use of FHA mortgages in illegal home sales. The essential idea has been to ban FHA financing for any home that has been re-sold during the past 90 days.

This is a complicated process because the purchase and quick sale of real estate is perfectly legal. What makes illegal flipping illegal is not the speed of the transaction but related activities such as a faked appraisal, fraudulent loan applications, dishonest closings, etc.

That said, speed IS an issue. Illegal flippers typically like to buy and sell as quickly as possible so they can re-use their money to make additional transactions, thus when HUD says you have to wait at least 90 days they are impacting illegal flippers.

Unfortunately, legitimate rehabbers and investors may also want to quickly buy and sell properties, thus a general rule against financing with an FHA loan if a home has been sold within the past 90 days impacts illegal flippers as well as legitimate players in the marketplace.

The Rule

The original anti-flipping rule was established in 2003. It was short, blunt and allowed for no case-by-case exceptions. In addition to FHA guidelines against financing homes that were sold within the past 90 days, the rules also said that HUD had the right to ask for a second appraisal if a home was being re-sold qithin 180 days and for additional paperwork if there had been a sale during the past year.

In time it was found that the rule was too inflexible and so it changed: The rule did not apply to estates, sales by non-profit groups, sales in presidentially-declared disaster areas, the sale of lender-owned foreclosures, etc. Finally in 2010 HUD suspended the rule.

And that brings us to the present. The FHA anti-flipping rule is suspended until February 1, 2011. So, will the suspension continue, will the rule be re-established or will a new and somewhat different rule be introduced?

The view here — and we’ll know for sure in a few weeks — is that the suspension will continue after February 1st. Why? Several reasons stand out:

First, the marketplace remains lousy. The Clear Capital reports home prices natiownide dropped -4.1 percent in 2010 and there were price declines in 70 percent of major markets. In 2011, Clear Capital expects another -3.7 percent drop.

In other words, this is not the best time to re-introduce a rule which would limit home sales.

Second, the suspension of the rule does not seem to have triggered an outbreak of illegal flipping. FHA underwriting requires fully-documented applications and real appraisals for new loans. Lenders who don’t play by the rules are being forced to buy-back sub-par loans and being thrown out of the FHA program.

Third, the tougher FHA enforcement efforts seen during the past two years coupled with the national licensing system for lenders and loan officers means it’s much easier to find who did what when a mortgage sours. And accountability is one sure way of stopping illegal flipping.

Full post as published by FHA Mortgage Guide on January 10, 2011 (boomark / email).