Loan Modification

FHA Mortgages & Flipping

By Peter G. Miller

The decision by the FHA to suspend its 90-day anti-flipping rule has raised a ruckus, in part because the term “flipping” is not fully understood.

A listserv for real estate brokers to which I belong has recently been discussing the issue of flipping and several writers seem aghast at the thought of quick profits in real estate. The idea seems to be that additional disclosures and “transparency” are required for speedy sales.

My response went something like this:

“Let’s imagine that an investor buys 100 shares of IBM stock this morning, there’s an announcement regarding a major technological breakthrough in the afternoon and the next morning the investor re-sells shares for an additional $10 apiece. Should the SEC discourage such buying and turning the property over because there are — according to some observers — no socially redeeming values?”

In other words, the issue with flipping is NOT that real estate is being quickly bought and sold, it’s that not all flipping is lawful. But the fact that some flipping is illegal and involves mortgage fraud, appraisal fraud and settlement fraud certainly does not mean that ALL flipping violates the law.

What amazed me about the listserv exchange is that some of the people most critical of flipping were real estate brokers and salespeople. This makes about as much sense as barbers objecting to short hair.

The fact is that home prices sometimes rise very quickly — think of the result from a zoning change. It’s also true that people have different perceptions of value. And, of course, in hot markets (remember them?) prices can often rise with great rapidity.

Baltimore

The anti-flipping rules for FHA loans were a reaction to a huge scam that took place in Baltimore a number of years ago. Home prices would rise within hours as properties were sold back and forth by insiders. New and higher prices meant that properties could qualify for bigger loans — if only there was an appraiser or two to validate the fair market values. And sure enough, such appraisers were found, as we an assortment of brokers, lawyers, investors and other players.

The prices, of course, were unreal, so when the properties were foreclosed the loan were no good. Since many of the properties had been financed with FHA mortgages, it was HUD that faced big claims for losses and it was also HUD which wound up with title to a large number of homes in Baltimore.

HUD ought to go after every fraudster it can find — but most investors are not engaged in any sort of illegality. They simply have a business which involves buying property at one price and selling at a higher price if they can. That’s like just about every other retail business in America. FHA guidelines and FHA loan requirements ought to encourage investors, that’s one way to soak up the excess housing inventory which now holds down prices nationwide.

Full post as published by FHA Mortgage Guide on March 22, 2010 (boomark / email).