The Nation's Housing
To boost sales of foreclosures, FHA suspends anti-flipping rules
Call it three birds with one stone: The federal government hopes to help low-down-payment home buyers, investors who fix up foreclosures, and communities burdened with too many bank-owned and foreclosed homes -- all with one potentially far-reaching policy change.
The Federal Housing Administration is revising its long-standing anti-flipping rules starting Feb. 1 and just might score a hit with all three target groups. For years, the FHA has had a strict prohibition: It wouldn't insure a mortgage on a house if the seller had owned it for less than 90 days. The ban was a reaction to fraudulent quick flips of houses that inflated their values far beyond market worth.
The flips often were pure cons: Buyer A would acquire a low-cost house in bad repair, make minor cosmetic changes and resell within days at a significantly higher price to Buyer B, who was also part of the scheme. The sequence could involve a string of serial flippers within a month or two, with prices spiraling upward.
The end game usually went like this: Find a hapless purchaser for the flipped house who would apply for a low-down-payment FHA loan. Typically, that buyer defaulted quickly -- leaving the FHA with a foreclosed house on its books and a loss to its insurance funds.
The FHA maintained its 90-day anti-flipping rule through much of the past decade. But now it is suspending the policy, at least for the next year. In an advisory to lenders, FHA Commissioner David H. Stevens said the agency will again provide mortgage insurance for some purchases in which the seller had closed on the property less than 90 days earlier.
The objective, Stevens said, will be to speed up sales of renovated houses to first-time and other purchasers. With foreclosures at record levels -- an estimated 2.8 million filings last year -- many communities are faced with excesses of bank-owned properties sitting unsold, often in poor repair.
By waiving the 90-day rule, private investors will be more likely to bid on these houses, fix them up and sell them to buyers who will now be able to gain early access to FHA financing, which offers 3.5 percent down payments.
What's the significance of the 90-day timeline? It's huge, say investors who specialize in acquiring and renovating foreclosures and bank-owned properties. Paul Wylie, an investor active in the Los Angeles area, says his group generally can acquire and rehab a house and list it for resale within 60 days.
But under the FHA's previous policy, large numbers of potential purchasers couldn't bid on Wylie's properties as soon as they hit the market. Barred from using low-down-payment loans until after 90 days, these buyers were forced to look to conventional mortgage sources, which often required 10 percent down plus private mortgage insurance.
"A lot of the people who want to buy our houses just don't have 10 percent," Wylie said in an interview. "But they can afford a 3.5 percent FHA down payment." Bobby Taylor, a broker with Coldwell Banker Mountain West Real Estate in Salem, Ore., said the FHA's change of heart "is going to be absolutely terrific" for anyone looking to bid on a moderately priced post-foreclosure house in good physical condition. Some buyers will even be able to combine the $8,000 federal tax credit with 3.5 percent FHA financing -- provided that their contracts are signed by April 30 and closed by June 30, when the credit program expires.
The FHA's revised policy does not throw open the floodgates to all post-foreclosure renovations, however. Stevens laid down two key restrictions designed to protect end buyers and the FHA alike:
-- No game-playing or conflicts of interest among buyers, sellers, realty agents or others involved in the deal are allowed. "All transactions must be arm's-length, with no identity of interest" among any of the participants.
-- Price run-ups must be relatively modest and justifiable from the time of the investor's acquisition to what is paid by the applicant seeking FHA financing. Generally, the limit will be 20 percent.
When the price jump exceeds 20 percent, the FHA expects participating lenders to require extensive documentation of the renovation expenditures made by the investors to justify the hefty price increase. Lenders also are required to order an independent property inspection so the purchaser can understand the house's physical condition and the improvements made.
The takeaway for buyers and investors: Check out FHA financing early in the game on foreclosure turnarounds.
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CORRECTION: To qualify for the $6,500 housing tax credit, purchase contracts may be signed prior to Nov. 7, 2009, provided that the closing occurs after that date. Last week's column said purchase contracts must be dated Nov. 7 or later.