In 2003 the Federal Housing Administration (FHA) feared that flipping homes was the cause of the skyrocketing home prices throughout individual neighborhoods. Because of this, the FHA no longer approved property loans that were resold within 90 days of the original purchase, with the exception of foreclosures owned by government sponsored enterprises (GSEs) such as FHA, Fannie Mae, and Freddie Mac. The anti-flipping rule is designed to help protect the FHA’s mortgage insurance program and federally chartered financial institutions from losses.
In February 2010, the FHA initiated a one-year suspension on the regulation that prevented “flippers” from purchasing single-family homes and releasing them into the market within 90 days. Since then, the FHA says it has insured 21,000 loans that had exchanged hands within the previous 90 days. The loans are worth more than $3.6 billion and would not have qualified for financing before suspension. An analysis of these loans suggest they do not present a greater credit risk than other loans, which lent support to the suspension’s extension.
The government sent a notice to banks in mid-January of 2011 in which it announced the extension of the waiver through the end of the year. According to FHA Commissioner David Stevens, the purpose of the extension was to accelerate the resale of REO properties in neighborhoods where there is a high rate of foreclosure. This will facilitate the purchase of homes that have recently been “flipped.” As a result, foreclosed properties will be moved off the market faster, reducing the amount of vacant homes in neighborhoods throughout the United States.
Limitations considered by the FHA consist of the following:
1. 20% Rule
If resale is higher than 20% of the original price, one must show proof of justified price. For example, if a $200,000 house is purchased and the resell price is $245,000, the house must undergo additional underwriting guidelines, which is considered a double appraisal.
2. Title Hold
No simultaneous closings are allowed when the seller holds a property. In other words, back-to-back, same-day closings to an FHA end-buyer is prohibited.
3. Short-term Funding
Investors must come up with short-term funding of the 30-to-60-day variety if their desire is to buy/fund and in order to sell to an FHA end-buyer.
4. Previous Flips
A property cannot show signs of prior flipping activity. If so, the FHA has the right to object.
5. Transactions at Arm’s Length
Transactions must show no identity of interest between the buyer and the seller or other parties that participate in the sale of a property.
Overall, this will help lower holding costs for investors/flippers allowing them to continue flipping more properties. In return, this will help bring more desirable homes to the market for first-time home buyers.
