October 9, 2009
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?
Action:
Optional
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
buyers.
4. Other
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.
Background:
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 lenders.
Support:
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 transaction.
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
the BOD:
“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. No. FR-4615-P01].”
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.
NAR Policy:
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 rehabilitation.”
Should C.A.R. support the elimination of or changes to the FHA 90 day anti-flipping rule?
