HUD Flip-Flops on Flipping Ban

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HUD is flip-flopping on its own flipping policy. Starting Feb. 1, the housing agency is temporarily lifting its ban on selling FHA-insured homes in fewer than 90 days. The ban was originally intended to discourage flippers. By lifting it, the housing agency is hoping to help stabilize home values and improve conditions in communities where foreclosure activity is high.

This is good news for investors, who can start turning homes around in a matter of days. The primary purpose, though, is to help buyers and revitalize neighborhoods. The policy change, effective for a period of one year, will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, hopefully helping to stabilize real estate prices."FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," said FHA Commissioner David H. Stevens. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

It's amazing that it did not occur to HUD officials before now that locking buyers out of an immediate purchase could cost them a good deal. Before the anti-flipping rule was put in place in 2003, investors could buy a house, say at $100,000, and re-sell it within hours or days to buyers for $150,000, as long as inspections and appraisals supported this re-sale value. This made for a mighty tidy profit, but also, HUD felt, opened the door to shady investors and predatory lending practices (not to mention helping to inflate the housing bubble). Closing that window for at least 90 days, the agency believed, helped keep the deals honest.

But in today's environment, the prohibition on quick re-sales has dampened potential deals, as investor-sellers were forced to incur the holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period. To cover those costs, they typically ask a higher price, so FHA-backed buyers often lost out on lower-priced opportunities.

There are a few conditions to the new policy, however:
  • The seller cannot be related to the buyer in any way. In other words, this must be an "arms-length" transaction.
  • If the home is being sold for a big profit -- which means 20 percent or more than what it was purchased for in the past 90 days -- then the FHA borrower's lender must justify the sales price via an appraisal, and possibly a second appraisal. This would include notations of detailing how the property has been improved upon to justify the higher sales price.
  • The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
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