Real Estate Finance Committee
Federal Issues Committee
This material is for discussion purposes only and has not been approved
by the Real Estate Finance Committee, Federal Issues Committee, Executive
Committee or the Board of Directors.
Issue: Should C.A.R. support the elimination of or
changes to the FHA 90 day anti-flipping rule?
Options: 1. Do Nothing
2. Support the elimination of the FHA 90 day anti-flipping rule.
3. Support changes to the FHA 90 day anti-flipping rule so legitimate
investors and developers will be able to sell their properties to FHA
Status/Summary: Currently, FHA will not insure a loan
for any property where title was transferred within 90 days. There
are some exceptions to this rule, including GSE REOs, HUD REOs, state and
federally chartered financial institution REOs, and properties where local
and state governments have taken possession. What is not exempted
from the rule are properties that were bought by investors and/or
developers looking to do quick fixes and then flip the property.
California’s housing market has evolved throughout 2009, and with mortgage
rates still at all time lows and home prices in the lower-end markets back
to pre-bubble levels, demand for this market in California has
skyrocketed. Multiple offers have become the norm for appropriately
priced homes. Many of these offers are from investors looking to take
advantage of low REO prices and turn them quickly for a profit. These
investors are now discovering that FHA homebuyers, who make up a
substantially large portion of today’s buyers, are not eligible to purchase
the flipped property.
In 2001, HUD issued a proposed rule that would have barred the FHA from
insuring mortgages for buyers purchasing properties six-months after the
property changed hands. The purpose of this was to protect the FHA
and its tax-payer guaranteed reserve funds from a rash of flipping scams
that were preying upon both the FHA rules and homebuyers.
While there were many scams going on, they would often involved in one form
or another collusion between investors, appraisers, agents, and/or
lenders. Investors would purchase properties at rock-bottom prices,
often in poorer neighborhoods and/or neighborhoods that had been hit hard
by foreclosures. The investor may or may not perform some cosmetic
improvements and then would resell the home after a few days or weeks at an
artificially inflated price. Appraisers in on the deal would support
the inflated price and a lender or mortgage broker would lie on the
homebuyer application. Sometime there were homebuyers who bought a
home not worth what they paid, and sometimes the buyers were fictitious
(straw buyers). FHA buyers may be more vulnerable to predatory loans
as they are usually first-time homebuyers and/or have little to no
financial education. In the end FHA was left holding the bill.
The 90 day rule was a compromise between HUD and industry parties.
The purpose of the 90 day anti-flipping rule was to garner support from
both business interests and consumer groups. Many lenders at the time
had implemented this practice prior to FHA making it official, so when the
anti-flipping rule went into effect there was little to no change for some
Proponents of changing the 90 day anti-flipping rule argue market
conditions have changed since 2001. Throughout 2009 investors have
purchased many properties helping to maintain a low inventory and high
demand throughout the year. Changing this law is necessary so as not
to discourage investors and drive them from the market.
The problem of participating parties colluding to defraud consumers and the
FHA is not as big of a concern now that Congress has passed the SAFE Act
requiring minimum requirement for mortgage originators and their national
registration, and the tougher appraisal standards that have removed the
ability to choose an appraiser from mortgage brokers and lender employees
whose compensation is determined by the completion of the
Opposition: Opponents of the change argue that the
law is doing exactly what it is suppose to do. That is, to prevent
properties from being bought cheap and sold quickly at inflated prices and
thus preventing out of control home appreciation and/or predatory
practices. This type of protection for FHA loans is more important
than other loans because at the end of the day the U.S. taxpayer is on the
hook for guaranteeing these loans. Additionally, FHA has historically
been the lender of last resort; this means some of FHA’s buyers are less
experienced when it comes to personal finances and may be easy targets for
predatory practices. These factors support taking a conservative
approach to protecting both the FHA and the homebuyer, which the 90 day
anti-flipping rule does.
Many investors are now trying to sell their properties to the same
first-time homebuyers who lost out in bidding for the same property.
So they are essentially asking these first-time homebuyers to pay a premium
for the same home they lost out on only a few weeks earlier.
Lastly, FHA does not have any means or threshold for investors or
developers to meet in order to prove and justify the higher prices.
C.A.R. Policy: At C.A.R.’s October 2001 business
meetings the REF committee took the following position that was approved by
“That C.A.R., in conjunction with NAR, “OPPOSE” the U.S. Department of
Housing and Urban Development Proposed rule regarding the Prohibition of
Property Flipping in HUD’s Single Family Mortgage Insurance Programs [Doc.
This position was taken in response to for HUD’s 2001 proposal which was a
six-month anti-flipping rule. C.A.R. does not have specific policy on
the 90 day anti-flipping rule.
According to NAR’s issue paper:
“While NAR supports the goal of addressing fraudulent property flipping, we
support the preservation of legitimate investment opportunities in property
Should C.A.R. support the elimination of or changes to the FHA 90
day anti-flipping rule?