New Anti-Flipping Rule from Bush Admin
New "Anti-Flipping" Rule Holds Lenders, Sellers and Appraisers Accountable
WASHINGTON - Housing and Urban Development Secretary Mel Martinez today announced a new initiative in the Bush Administration's efforts to crack down on predatory lending. HUD published a final rule today in the Federal Register addressing property "flipping" on mortgages insured by the Federal Housing Administration (FHA).
Property "flipping" occurs when a recently acquired property is resold for a considerable profit with an artificially inflated value.
"The Bush Administration is committed to maintaining a strong housing market in which consumers can feel confident that they are protected from unscrupulous practices," Martinez said. "This final rule represents a major step in our efforts to eliminate predatory lending practices."
Predatory lending results when home purchasers become unwitting victims of lenders, sellers and appraisers, often working together. The unsuspecting homebuyers either purchase homes with sales prices far in excess of the fair market value, or are substantially overcharged with costs associated with obtaining a mortgage.
The final rule, "FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs," (view as TEXT or view as PDF file) makes recently flipped properties ineligible for FHA mortgage insurance. It also allows FHA to better manage its insurance risk by requiring additional support for a property's value when a significant increase between sales occurs. Features include:
Sale by Owner of Record: Only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for the loan; it may not involve any sale or assignment of the sales contract, a procedure often observed when the homebuyer is determined to have been a victim of predatory practices.
Time Restrictions on Re-sales:
Re-sales occurring 90 days or less following acquisition will not be eligible for a mortgage to be insured by FHA. FHA's analysis disclosed that among the most egregious examples of predatory lending was on "flips" that occurred within a very brief time span, often within days. Thus, the "quick flips" will be eliminated.
Re-sales occurring between 91 and 180 days will be eligible provided that the lender obtains an additional appraisal from an independent appraiser based on a re-sale percentage threshold established by FHA; this threshold would be relatively high so as to not adversely affect legitimate rehabilitation efforts but still deter unscrupulous sellers, lenders, and appraisers from attempting to flip properties and defraud homebuyers. Lenders may also prove that the increased value is the result of rehabilitation of the property.
Re-sales occurring between 90 days and one year will be subject to a requirement that the lender obtain additional documentation to support the value to address circumstances or locations where HUD identifies property flipping as a problem. This authority would supersede the higher expected threshold established for the above-mentioned 90 to 180 day period and will be invoked when FHA determines that substantial abuse may be occurring in a particular locality.
Other recent actions by the Bush Administration to protect homeowners from predatory lending and promote homeownership include:
A proposed rule making lenders accountable for appraisals on mortgage insured by FHA.
A recent plan announced by HUD to expand protection of homeowners by proposing performance standards for appraisers of FHA-single family homes under its Appraiser Watch Initiative. Under Appraiser Watch, some 25,000 appraisers will be held accountable for faulty appraisals, which too often lead to default and foreclosure. FHA will monitor appraisers' default and claim rates and will levy sanctions - including removal from its list of approved appraisers - against those whose rates are excessive.
A proposal to reform the regulatory requirements of the Real Estate Settlement Procedures Act (RESPA) that would make the process of buying and refinancing a home significantly simpler, potentially less expensive and would protect consumers from unscrupulous lending practices.
The "Homebuyer Bill of Rights," which requires greater disclosure of costs associated with buying a home, allows consumers more choices in choosing providers of closing services, limits excessive settlement fees and encourages innovation and competition in the marketplace.
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities, creating affordable housing opportunities for low-income Americans, supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet.
No, that was not the message. The thrust of the post is that HUD often becomes the owner of overpriced foreclosed properties simply because unscrupulous investors engaged in loan fraud.
HUD as seen a pattern of activity involving loan fraud most often when the property is quickly flipped. The HUD regulations that now require title seasoning to qualify for FHA financing are designed to reduce the number of foreclosures that HUD might acquire in the future as a direct result of loan fraud.
For the past several years, HUD has consistently placed property on the market at or near its FMV. Because these properties often need rehab and investors have positive cash flow or profit needs, investors do not find many diamonds in the rough in the HUD inventory.
This is not to say that diamonds are not there, they are just few and far between.
No, that was not the message. The thrust of the post is that HUD often becomes the owner of overpriced foreclosed properties simply because unscrupulous investors engaged in loan fraud.
HUD has seen a pattern of activity involving loan fraud most often when the property is quickly flipped. The HUD regulations that now require title seasoning to qualify for FHA financing are designed to reduce the number of foreclosures that HUD might acquire in the future as a direct result of loan fraud.
For the past several years, HUD has consistently placed property on the market at or near its FMV. Because these properties often need rehab and investors have positive cash flow or profit needs, investors do not find many diamonds in the rough in the HUD inventory.
This is not to say that diamonds are not there, they are just few and far between.
Not really anything new here. This rule has been in development for at least a year, if not longer. Last fall, HUD invited public comment on the proposed rule, and the version proposed back then was more severe than the final rule. It is unfortunate that the illegal practices of a few predators required this regulation.
Despite commenting on the rule back in November last year, I am sorry that the drafters did not state that the rule attempts to reduce the default rate on federally insured loans by curbing the incidence of loan fraud by unscrupulous investors in pursuit of a property flip. Instead, their definition of "flipping" erroneously suggests that the flip itself is illegal.
As a property investor for over 30 years and also a real estate broker and mortgage broker, I have seen the ramifications on buyers and sellers because of government "flip" rules that have been in effect for government insured loans for over 2 years already. It is negative for all concerned because it means that someone that needs to sell loses out on at least 60% of the potential buyers who have credit "glitches", so it becomes more of a distress sale or potential foreclosure. There are reputable lenders that will allow "flips" using their money for the purchase and resale. With lenders now also requiring a 12 or 24 month chain of title, It makes it even harder for non-conforming buyers to qualify for a HUD or other government repo, or government insured financing.The solution has been for reputable lenders to loan up to 100% on non owner occupied conventional financing. This allows the new owner or flipper to seller finance a portion or all of the buyer's purchase for the required period of time, whether 90 days or 2 years.Upon 6-12 months of timely payments by the new buyer, it becomes a conventional refinance and does not require use of government backed insurance or money. The problem that brought on this whole scenario wasn't due to just unscrupulous parties to the transactions, but the fact that FNMA & GNMA decided that they wanted to control the market on mortgage backed securities after the S & L crisis, and now control 80+% of all mortgage backed securities. So guess what..you can control your investments and still flip as long as you handle the chain of title problem and stay away from government backed financing. Good luck investors, and remember that the lender (investor) is the one that understands how to profit off mortgage securities as well as provide homes to potential buyers at fair market value..
Anyway possible that will try to weed out the laymen way of making money.Or as rich dad said the self employed. Two of the three occupations that will are being held accountable for this practice are the appraisers and real estate investor. You tell me a lender who can't lend out money. They'll just find other things to finance that are not under this regulation. However this allows me to come up with a strategy to counteract this. The thing I don't like is the time limit you must have the house for. I can sell to fha buyers for fair market value but I have to keep the house for ninety days. That sucks. We'll fortunately you might keep a rehab for ninety days doing repairs depending on its condition. There must be a loophole to rule. We gotta get this guy outta office soon.
As I read it now, this rule only imposes a timeline if the buyer will use a FHA insured loan to purchase your property.
Owner finance, Contract for Deed, Lease Option, cash buyer, conventional financing, hard money loan, are all still available to flip the property within the first 90 days.
bigdredd, I agree. Though I appreciate the attempts to eliminate fraud, we must remember that nobody's arm has been twisted to be a part of any real estate transaction. The market can work just fine here, though any fraudulent appraisers and hidden co-conspirators should be weeded out.
I also agree that Bush should go. He pretends to be a friend of all Americans, but his agenda (especially with the "tax cuts for only the wealthy" proposal) is to p***** out lots of fat subsidies to the corporate welfare queens who'd be lost if they actually had to bid competitively on a government contract. Among the most egregious, is the awarding of nearly $1 billion in contracts to Haliburton, without any competitive bidding allowed. Cheney, as you recall, was once Chair (or was it CEO?) of Haliburton. I like how all this money from Iraqi oil is going to pay for rebuilding Iraq (after we paid for destroying it). Do you think Iraqis will have anything to say about how this money get spent, or who gets the contracts? Of course not. It's a thinly veiled scheme to pocket the revenues from Iraqi oil. Talk about a turkey shoot!
I'd better stop. I'm starting to sound like a liberal!
Loon,
Actually you sound like a Democrat. Perhaps, if you are a Democrat, you could explain how the Bush tax cut is any different from the JFK tax cut back in 1962. As I recall after the JFK tax cut, the American economy enjoyed a period of tremendous growth and prosperity.
If the proposed Bush tax cut really does benefit the wealthy, then I would think that you would want to be behind it 100%. After all, why you are into REI if you aren't planning to join the ranks of the wealthy?
I am just yanking your chain. I really don't want to start a political debate here.
Guys, I don't think its a thing of Bush Admin or Clinton Admin. or whoever the next Admin is. I am an investor in So. Cal and I have been watching this very scenario of fraud happen over and over. Anyone who knows San Bernardino Calif., knows what i am talking about. The place is littered with vacant HUD homes that have been bought back by HUD at rediculous prices.
I have a guy that works for me who came to this country some years ago, and never built good credit, so he tells me about how he came across a real estate broker 2 years ago who said his credit wasn't a problem. They tried to put him in a house that was nothing more than a rehab with a fresh coat of paint, steam cleaned old carpet, stuck wood frame windows, weak squeaking floors, etc. We've all seen the 1950's wood sided house like this. They would sell him the house for $129,000. I could not believe it, because I turned down buying another similar rehab in that area for $72,000 because i would have needed to put about $17,000 and 3 months of work into it and could not see it selling (legitamately) for more than $95,000 in order to get it sold quickly.
They told him they would handle everything and that he didn't even have to make payments, they would pay them for a while and then let the house go back to HUD, he would get $5,000 cash for letting them use his name, and they would pay $495 to some credit repair company to get the foreclosure removed from his credit reports.
He did not do it, but somebody bought it for $129,000. The house sat there empty with a HUD sign on it for nearly a year before price values increased, interest rates kept dropping, and HUD accepted an offer of $108,000. That was still too much in my opinion because the place still needed some work, but as anyone out there buying REO's in So Cal will tell you, consumers are overbidding on properties like crazy right now. But the point is that HUD ate more than $30,000 when you consider holding costs and 6% selling commissions.
The original real estate salesman, the appraiser, the buyer, and maybe even the mortgage broker were all in on this deal.
Just last Wednesday I went to look at a rehab deal. It was an old 1 bdr house in terrible shape asking $65,000 and right next door was a HUD sign on a house that somebody divided into a duplex of tiny 1 bdr 1bath units. They could not have spent more than 2 weeks of shabby work on this place, and I asked the neighbor how long it had been vacant, they told me at least a year and a half maybe two years. I went back and looked it up, sure enough, $140,000 HUD Repo.
Those are just two examples, but again and again I see vacant houses with HUD signs on them where you look at the price they took it back for, and there is absolutely no way anyone in their right mind would value it that high without some appraiser on the take or getting a kick back. And they sit there for months til HUD drops the price combined with the low interest rates that allow sellers to continue bumping up selling prices causing surrounding values to go up quickly. As a matter of fact, I found out that HUD (Goldenfeather Realty handles HUD repo's in our area) has gotten crafty now, where sometimes when take a house back, they will put their sign on the property, but they won't even put the house on its list of properties for bidding, maybe for 6 months or more its not listed, because they know they are in it too high and they do not want to dilute the frenzy of buyer's right now by having properties that stuck on their list for months. The properties they put on this list are overbid almost every time by hyped consumers, becuase the real estate agents will tell all their buyer clients..."if you really want a house you have to bid agressively with an overbid or you will miss out." Extremely few deals with investor margins right now in HUD homes in So Cal. They are purposely keeping some properties off the list, knowing the surrounding market prices are rising. I think they are playing with fire in that little game, but that's another issue as well.
Anyway, the thing the gov't is trying to target is the issue of speed. In order to take a house that has a current condition of value at $70,000 and turn it into $120,000 legitemate value, it is nearly impossible to do it in less than 60 days, unless you have a crew or handyman working at it 6 days a week. I know, because I have done it 4 times in the last 18 months.
But like everything the gov't does, its slow to react, is either heavy handed or does far too little to fully address a problem, and usually their solution or regulation has a broad brush that infringes upon or injures legitemate business along its path. It's like a commercial fishing trolly that casts its net into the school of fish and pulls in everything with their catch from sharks to octipi which get tossed back into the ocean dead or alive with a frenzied flock of sea gulls feasting away on each side of the boat.
And also as is the case with gov't, they will eventually make some adjustments in the program to make it more business friendly, but it will probably not be enough improvement and they will take forever to act on it, when its something that is just plain commen sense to everybody else except them.
Are you saying HUD property should be avoided as an investor?
I am in California and am presently looking at two different HUD properties for possible rental income properties.
Thanks so much for taking the time to write this article. Appreciate it...............
No, that was not the message. The thrust of the post is that HUD often becomes the owner of overpriced foreclosed properties simply because unscrupulous investors engaged in loan fraud.
HUD as seen a pattern of activity involving loan fraud most often when the property is quickly flipped. The HUD regulations that now require title seasoning to qualify for FHA financing are designed to reduce the number of foreclosures that HUD might acquire in the future as a direct result of loan fraud.
For the past several years, HUD has consistently placed property on the market at or near its FMV. Because these properties often need rehab and investors have positive cash flow or profit needs, investors do not find many diamonds in the rough in the HUD inventory.
This is not to say that diamonds are not there, they are just few and far between.
No, that was not the message. The thrust of the post is that HUD often becomes the owner of overpriced foreclosed properties simply because unscrupulous investors engaged in loan fraud.
HUD has seen a pattern of activity involving loan fraud most often when the property is quickly flipped. The HUD regulations that now require title seasoning to qualify for FHA financing are designed to reduce the number of foreclosures that HUD might acquire in the future as a direct result of loan fraud.
For the past several years, HUD has consistently placed property on the market at or near its FMV. Because these properties often need rehab and investors have positive cash flow or profit needs, investors do not find many diamonds in the rough in the HUD inventory.
This is not to say that diamonds are not there, they are just few and far between.
My problem with this is that some of us find really good deals, occasionally. Like one I picked up recently. The property had gone to tax sale and the redemption period was expiring in 5 days. It was vacant heir property and they did not have the $8,000 needed to redeem the property. It was GONE!!!! I stepped in, paid it and gave them $48,000 for the house as well because I didn't want to just "steal" it. I wanted the son to get something out of the house -- whether he blew it or not wasn't my business (although I knew he would. The house was free and clear except the taxes. If somebody can't figure out how to navigate those waters,......). Anyway, I only needed to spend a few thousand in the house painting, new appliances, a good cleaning. That was all that was needed. The market value (and appraisal) is $136,000. Nothing wrong with this transaction. I was just in the right place at the right time. Tell me, how does 90 days improve upon this situation? IT simply doesn't. Just another example of how your government thinks. I also take exception to the use of the word "flipping" which is in itself, perfectly legal. Gt the bad guys, leave the rest of us alone and let us do our job -- putting good housing stock back on the market!
hello i live in a area where the market is good. I'm looking to build new homes i get them for today prices they are done in 1 yr so the market value is much higher i stand to sell for around 30,000 more the what i paid for it and they sell in my area with in a month 2 most. i plan putting it on the market same day i close. would this be consider flipping and could not sell to anyone getting fha loans? This is crap people flip proerty tomake money and put alot into fixing them up to get a higher price but those cases have them longer then 90 days but in my case I won't. So do I have to wait 90 days??
sadie
This policy has absolutely nothing to do with any President.
I think some regulation is good, but this industry is getting regulated up the ying yang already...and its just getting worse.
I purchased a home for $58,000. Did a gut rehab-- installing all new windows, tearoff roof and replaced it, new siding, new insulation and drywall, tile, refinished hardwood floors, new electrical down to the conduit and serivice, plumbing etc...
All of the work, improving the value considerably!! The appraisal came out at $170,000 and I had already sold it to a buyer on an FHA Nehemiah loan for $160,000.
Everything completely legitimate, as I've always done.
The underwriter gives us a "clear to close"....then 10 minutes later calls and cancels it saying that it hasn't gone past the 180 day time period that FHA just mandated in May 2003.
The underwriter demands another appraisal, but she could have told us about it earlier, and had I known, I'd have ordered a second appraisal when I ordedred the 1st one.
This costs me another week of time, and now I've got to reorder a payoff letter for my existing mortgage.
I can't wait to find a conventional Nehemiah-type program that I can use, so I don't have to go FHA anymore.