Update on the 90 Day Flip Rule

Having worked for several years with the California Association of Realtors, I often turn to the information they can provide that I can share with you, my Sacramento readers.

Here’s what they say on the Flip Rule:

“Status/Summary:
Currently, FHA will not insure a loan for any property where title was transferred within 90 days. There are some exceptions to this rule, including GSE REOs, HUD REOs, state and federally chartered financial institution REOs, and properties where local and state governments have taken possession. What is not exempted from the rule are properties that were bought by investors and/or developers looking to do quick fixes and then flip the property.

California’s housing market has evolved throughout 2009, and with mortgage rates still at all time lows and home prices in the lower-end markets back to pre-bubble levels, demand for this market in California has skyrocketed. Multiple offers have become the norm for appropriately priced homes. Many of these offers are from investors looking to take advantage of low REO prices and turn them quickly for a profit. These investors are now discovering that FHA homebuyers, who make up a substantially large portion of today’s buyers, are not eligible to purchase the flipped property.

Background:
In 2001, HUD issued a proposed rule that would have barred the FHA from insuring mortgages for buyers purchasing properties six-months after the property changed hands. The purpose of this was to protect the FHA and its tax-payer guaranteed reserve funds from a rash of flipping scams that were preying upon both the FHA rules and homebuyers.

While there were many scams going on, they would often involved in one form or another collusion between investors, appraisers, agents, and/or lenders. Investors would purchase properties at rock-bottom prices, often in poorer neighborhoods and/or neighborhoods that had been hit hard by foreclosures. The investor may or may not perform some cosmetic improvements and then would resell the home after a few days or weeks at an artificially inflated price. Appraisers in on the deal would support the inflated price and a lender or mortgage broker would lie on the homebuyer application. Sometime there were homebuyers who bought a home not worth what they paid, and sometimes the buyers were fictitious (straw buyers). FHA buyers may be more vulnerable to predatory loans as they are usually first-time homebuyers and/or have little to no financial education. In the end FHA was left holding the bill.

The 90 day rule was a compromise between HUD and industry parties. The purpose of the 90 day anti-flipping rule was to garner support from both business interests and consumer groups. Many lenders at the time had implemented this practice prior to FHA making it official, so when the anti-flipping rule went into effect there was little to no change for some lenders.

Changing the 90 day anti-flipping rule is a recognition of how market conditions have changed since 2001. Throughout 2009 investors have purchased many properties helping to maintain a low inventory and high demand throughout the year. Changing this law is necessary so as not to discourage investors and drive them from the market.

The problem of participating parties colluding to defraud consumers and the FHA is not as big of a concern now that Congress has passed the SAFE Act requiring minimum requirement for mortgage originators and their national registration, and the tougher appraisal standards that have removed the ability to choose an appraiser from mortgage brokers and lender employees whose compensation is determined by the completion of the transaction.”

I’ve had a few deals this year where the 90-rule was a almost a deal-breaker. In fact, it really seems unfair if you think about it. Here I had a buyer who was qualified and found the perfect Sacramento home, yet because the home had been previously purchased and not lived in, fixed up and listed at a profit, the buyer could not have it.

After that incident, I began to really pay attention to all aspects of this rule so that I can better serve my clients. I’m happy that there are less stringent requirements on this rule now. After all, I want my Sacramento investment buyers to be able to buy a Sacramento home and then flip it. Where as, I also want my Sacramento home buyers to be able to get a good deal.

All in all, if the deal is fair for everyone, the lenders need to put these silly rules to rest. That’s what I say!

Ta ta for now,

Tamara