FHA Drops Anti-Flipping Waiver, 90-Day Rules Reinstated

The following article is copyrighted by and reprinted with the permission of the Association of Real Estate License Law Officials (ARELLO®).

The U.S. Federal Housing Administration (FHA) has announced that, for the first time since 2010, it will  not extend its waiver of the “anti-flipping rule”; which means that, effective December 31, 2014, federal regulations will prohibit the use of FHA-insured financing to purchase single family properties that are resold within 90 days of their previous acquisition.

The FHA defines “property flipping” as the practice in which recently acquired properties are resold for a considerable profit at an artificially inflated price, often as the result of a lender’s collusion with an appraiser [or other transaction participants, such as mortgage originators and real estate licensees.]

According to the FHA, most property flipping occurs within a matter of days after acquisition, and usually with only minor cosmetic improvements, if any, to the property.

In an effort to preclude the practice with respect to FHA-insured mortgages, HUD issued a final rule in May 2003 [24 CFR 203.37a] that prohibits the issuance of FHA insurance if the contract of purchase and sale for the property securing the mortgage is executed within 90 days of the prior acquisition by the seller.

Under the rule, re-sales occurring between 91 and 180 days and between 91 days and one year, from acquisition may be eligible for FHA insurance,  subject to special valuation documentation requirements. Exemptions from the resale restrictions apply to HUD and other federal agency sales of real estate-owned (REO) properties, sales by approved nonprofit organizations, sales by state- and federally-chartered financial institutions and government-sponsored enterprises (GSEs), and sales of properties in designated federal disaster areas.

In 2010, the FHA waived the 90-day anti-flipping rule in order to encourage investors to renovate foreclosed and abandoned homes, help stabilize real estate prices and support communities with high foreclosure activity.

To qualify for the waiver, transactions had to be “arm’s length” (as defined by the waiver rules) and if the sale price was more than 20 percent above the seller’s acquisition cost, the lender was required to take specific steps to document and justify the increase.

FHA’s waiver of the 90-day rule has been periodically extended through 2014, with strong support from industry groups such as the National Association of REALTORS®.

However, the Office of the Inspector General for the U.S. Department of Housing and Urban development (OIG-HUD) recently issued a report raising concerns about HUD’s oversight of lender compliance with the waiver requirements The OIG report estimated that the situation presented significant risk to the FHA Mutual Mortgage Insurance Fund (MMIF), which supports the insurance program. The OIG recommended that HUD either strengthen tis oversight controls or discontinue the waiver at the end of 2014. FHA apparently has made its choice, announcing in early December that it will not extend the waiver beyond December 31, 2014.

In a November news release, RealtyTrac®, “the nation’s leading source for comprehensive housing data”, released its “Q3 2014 U.S. Home Flipping Report” showing that 26,947 U.S. single family homes were “flipped” (purchases followed by re-sales within 12 months) nationwide in the third quarter of 2014.

The statistic represents 4.0 percent of all U.S. single family home sales and is down from 4.6 percent in the second quarter of 2014 and 5.6 percent in the third quarter of 2013; the lowest level since the second quarter of 2009.

This article came from the October 2015-Vol46-2 edition of the bulletin.