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December 6th, 2012

FHA continues to waive anti-flipping rule

by Peter Miller

 

4-FHA-logoFor the fourth time since 2010, HUD has decided to waive its anti-flipping rule, good news for real estate markets nationwide which remain hobbled by the mortgage meltdown.

Starting in 2003, HUD set out regulations which prohibited the use of FHA-insured financing for properties that had been resold within the past 90 days. The purpose of the rule was to stop illegal flipping, the practice of selling homes through the use of mortgage fraud and appraisal fraud.

The HUD rule meant that FHA-insured loans were off limits, limiting the ability of borrowers to finance illegally-flipped properties and thus inhibiting fraudulent re-sales.

The rule has flaws

The rule was well intended but had a number of substantial flaws.

For example, the rule was originally applied to properties being resold by HUD, properties acquired by inheritance, properties being resold by nonprofit groups and properties which came on the market through the foreclosure process. In time, such sales would be allowed as HUD carved out exceptions to the original anti-flipping rules.

Even with exceptions, the anti-flipping rule remained problematic. Its biggest flaw has been that legitimate rehabbers and developers–investors and companies with the ability to quickly repair homes for resale–were hurt by the HUD rule even though they operated entirely within the legal system and performed a social service by getting homes quickly back into the housing inventory.

Rule waived to revive local markets

By 2010, with markets still shaken across the country, HUD waived its anti-flipping rule in an effort to help restart local markets. The results showed the importance of the rehab community: Between February 2010 and December 2011, HUD made nearly 42,000 additional loans as a result of waiving the anti-flipping rule.

HUD’s most recent announcement said that the rule will be waived until Dec. 31, 2014. In other words, instead of an annual waiver, the newest ruling is good for two years.

Just do away with the rule

Why HUD does not simply do away with their anti-flipping rule is not entirely clear.

By the end of 2014, it will have been suspended for five years, long enough to show that it is an unnecessary regulation. Alternatively, it may be that HUD wants the regulation on the books for public relations purposes, and also if illegal flipping again becomes a problem.

While the news from HUD should be applauded, there still remains the problem that the private sector has generally kept the rule in place, which means that buyers of legally rehabbed properties may have a tough time getting mortgage financing even though the seller is a legitimate rehabber.

A time when mortgage rates remain low and loan standards have become stronger, the HUD anti-flipping rule is no longer necessary, something which seems obvious from the repeated practice waiving it on an annual basis. The two-year suspension is a step in the right direction, an effective end to a regulation which was well-intended but difficult to design without impacting legitimate investors.

For additional information, investors and rehabbers should speak with lenders to see if private-sector financing is also available to buyers for properties which have been quickly turned around.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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