HUD Limits Property Flipping

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Following is a Press Release from the U.S. Department of Housing and Urban Development, that I thought would be on interest to the TCI community:



HUD No. 03-055

Lemar Wooley

(202) 708-0685 x 6631

www.hud.gov/news

For Release

Thursday

May 1, 2003







BUSH ADMINISTRATION PROVIDES HOMEBUYERS NEW PROTECTION FROM PREDATORY LENDING PRACTICE

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.


Comments(7)

  • tembenite7th October, 2003

    Anyone know when this goes into effect?

  • Roswitha7th October, 2003

    I believe it got in effect May 30.2003.

    Messed me up, big time.

    I flip property the legal way, but now I have to change the way I do my Real Estate investments.

    • mshepherd_20018th October, 2003 Reply

      How do you get around this?

      • DaveT12th October, 2003 Reply

        What everyone seems to have overlooked in this HUD regulation, is that it only applies to FHA insured loans.



        If your buyers do not plan to use FHA insured financing, then this regulation does not apply to you.

  • flyhomes12th October, 2003

    Are there any loop holes like "sublect to", owner financing with assumption, land contacts, lease option with the right to assign. And if is no assencial if it is financed conventionaly.

  • sammyvegas12th October, 2003

    Can you say Fannie Mae; Freddy Mac?? Neither have (as of yet) an antiflipping policy.



    Probably of more importance to the flipper is that appraisers must address the history of the property over the past 3 years (use to be only 1 year). So, the flipper is going to have some accountability to justify the resales price.



    HUD only limits resales in the first 90 days and places resonable restrictions on resales in 91-180 days. Usually it takes 30 days to rehab/remodel. The property could be leased to the prospective buyer during the 90 day waiting period. That's not the best solution but it is a palliatiive.



    I don't think it will have a big impact on legitmate flipping. The intent is to stop (easier said than done) fraudulent flipping generally involving the loan broker, the seller, and the appraiser (any or all of them).

    • mortgageman13th October, 2003 Reply

      yes it is true that the law pertains to HUD insured loans. Howver, there has been a ripple effect throughout the lending industry where the word "flipping" is considered as something ver very bad. So that even non-insured loans are going to be heavily scrutinized, and some lenders may not do the loan, bvecause the seller has not justified why he is making a nice profit on the deal. So you will asked to document what you did to repair the property, the appraiser will have to document the sales history of the property, and verify by way of pictures the work that was done to the property. The lender will then send a second appraiser to do a field review of the property to certify the value.

      Finally, it will be up to the lender to determine whether the profit you are making is "reasonable".

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