PMC Mortgage Lender's Blog

Last year the Housing and Urban Development (HUD) Secretary, Shaun Donovan, temporarily suspended the FHA’s 90-day flipping rule for a period of one year beginning February 1, 2010.

Now, within days of the waiver’s expiration, Jon Prior, HousingWire.com reports that the FHA “will suspend its anti-flipping rule for a second year in 2011.”

A HUD spokesman confirmed to Housing Wire last Friday that a waiver extension of the “rule was currently in the clearance process.” An official notification will be posted thereafter.

The original anti-flipping rule was established in 2003 and was designed to prevent fraud. Borrowers using FHA-backed loans were prohibited from buying homes that had been owned by sellers for less than 90 days.

One popular method of mortgage fraud involved straw buyers (fictional or “dummy” buyers) who purchased homes with FHA loans. Once the loans were closed, titles to the mortgaged properties were quickly transferred to investors or other entities in violation of FHA regulations.

Unfortunately, the anti-flipping rule adversely affected legitimate purchases of foreclosed and damaged homes. Small scale investors could rapidly repair and resell such homes in less than 90 days.

FHA found that these sellers were unwilling to accept contracts from FHA buyers. If these sellers had to wait 90 days to sell their vacant property to an FHA borrower, they bore the risk of vandalism and increased crime, declining neighborhood property values and a lack of return on their investments for operating expenses.

Under HUD’s existing 90-day flipping rule waiver, strict conditions must be met. Here are the major points:

• All transactions must be at arm’s-length with no identity of interest between the buyer and seller or other parties participating in the sales transaction.  •   The seller must hold title to the property.  •   Corporations, LLCs and trusts serving as sellers must legitimately operate under applicable state and Federal law.  •   No pattern of flipping activity should be evident in the past 12 months.   •  The property must be marketed openly and fairly.
• A sale price of 20 percent or more above the seller’s acquisition cost requires the lender to provide supporting documentation of repair or renovation and/or a second appraisal.  •   A property inspection report must be ordered by the lender and provided to the borrower before closing.  •   Inspections must include FHA’s required list of property items.
• The waiver is limited to forward mortgages and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Agents who are presently a party to a flip sale transaction should check with Paramount Mortgage for specific details about the waiver rules.