On Friday, HUD Secretary Shaun Donovan announced that FHA mortgage insurance will be allowed on foreclosed properties that are quickly resold or "flipped." The policy shift is a welcomed change. The Anti-Flipping Rule adopted in 2003 as 24 CFR 203.37a(b)(2) was designed to address predatory lending practices where a Lender, Seller and/or Appraiser might perpetrate a fraud on an unwitting homebuyer by reselling a property far in excess of the fair market value or with substantial overcharges tied to the new mortgage.
While the Rule may have helped on that front, it unnecessarily targeted foreclosures which are commonly flipped... either by the bank or an investor. Typically, in today's foreclosure environment an investor will purchase a foreclosed home at the Trustee's Sale only when the property can be bought at a discount from the fair market value. The home is then rehabbed as necessary and resold at fair market value as quickly as possible to avoid holding costs and risks incident to ownership, often the resale occurs well within 90 days.
Importantly, the notion of a fraudulent sale in excess of fair market value to an unwitting homebuyer does not arise nor is it a threat. Instead, the reality in today's market is that an investor will not entertain a purchase offer from a buyer who requires FHA financing which is bad for the buyer, bad for the seller, and bad for the community seeking to stabilize property values at full fair market. Kudos to HUD for finally recognizing this negative influence in the housing market and doing something about it. The waiver will take effect on February 1, 2010, for one year unless otherwise extended or withdrawn.
Also, note that the waiver comes with the following limitations:
- The transaction must be at arms-length
- If the sales price is 20% or more above the acquisition cost the lender must meet conditions concerning appraisal and property inspection
- The waiver is limited to forward mortgages, no Home Equity Conversion Mortgages
Interestingly, HUD acknowledged that eliminating the 90-day resale restriction will give the FHA greater opportunity to dispose of its single-family REO "in a way that maximizes the return to the FHA mortgage insurance fund" (in other words at the highest price). So HUD saw that the Anti-Flipping Rule not only hurt buyers, sellers, and our communities but hurt the FHA too.
The waiver is good in that it helps investors quickly resell foreclosed properties at full fair market price which will also help occupy homes and stabilize values. The waiver is good in that it makes available to buyers FHA-insured mortgage financing on a growing portion of the available homes for sale. The waiver is good in that it helps mitigate potential FHA mortgage insurance fund losses by increasing what buyers may be willing to pay for distressed properties.
The bottom line is, it's all good.