by Broderick Perkins
(1/4/2012) - To help keep foreclosures moving through the distressed property pipeline, the Federal Housing Administration (FHA) has again made it easier for investors or others to "flip" properties.
With certain restrictions, investors can continue to enjoy an FHA waiver on an anti-flipping rule that forbade buyers to use FHA-insured financing to buy and then quickly resell or "flip" distressed properties. The latest extension on the waiver runs through the new 2012 year.
"This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight," said acting FHA Commissioner Carol J. Galante.
"FHA remains a critical source of mortgage financing and stability and we must make every effort to promote recovery in every responsible way we can," Galante said.
Investor buys largely comprised the 38 percent of homes purchased with cash in 2011, according to HanleyWood's Housing Intelligence Pro, but real estate wheeling and dealing has not always been welcomed with open arms.
The Federal Reserve Bank of New York's recent study "Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis," says investor flipping — buying, fixing up, and quickly reselling with hopes for a decent profit — helped quickly drive up prices and that contributed to the housing crash.
Back in 2003, the Department of Housing and Urban Development (HUD) first issued the now temporarily-waived FHA rule prohibiting the FHA from insuring mortgages on homes that were owned by the seller for less than 90 days.
The rule was designed to avoid flipping that came with highly-inflated prices some investors used to target unsuspecting borrowers at the onset of the heyday of skyrocketing prices.
Since the original anti-flipping waiver went into effect on February 1, 2010, FHA has insured nearly 42,000 mortgages worth more than $7 billion on properties resold within 90 days of acquisition. FHA says, acquiring, rehabilitating and reselling properties can often take less than 90 days without becoming overpriced.
The FHA reasons, given today's soft housing market, prohibiting the use of FHA mortgage insurance for homes subject to resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.
Some critics of the waivers say they've contributed to a new kind of flipping called "flopping," a scam that targets short sales, but the FHA has again extended the waiver through 2012.
The latest anti-flipping waiver extension, however, comes with the same requirements as prior extensions, which tend to guard against flopping.
To use FHA financing to buy a HUD- or bank-owned property, or a property resold through private sales and resell it within 90 days, the buyer-turned-seller (investor) must:
Engage in an "arms-length transaction," a transaction that has no identity of interest between the buyer and seller or other parties participating in the sales transaction.
Document the justification for any increase in price when the sales price is 20 percent or more above the seller's initial acquisition cost. The lender in such transactions must also meet specific controlled conditions.
Finance only "forward" mortgages, but not Home Equity Conversion Mortgage (HECM - reverse mortgages) for purchase program.
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