To bring everyone up to speed, the Federal Housing Administration (FHA) was created as an independent federal agency in 1934 to promote mortgage lending by providing insurance to banks for a portion of the loan. FHA was created to reduce the risk of loss by banks during the Great Depression.

You should understand, that the FHA does NOT loan money. It’s essentially an insurance company that insures a certain portion of a loan made by a traditional mortgage lender. Since the FHA doesn’t loan money, it does not dictate the amount of money a lender can charge for interest, discount points or other fees; that’s between the lender and the borrower.

However, the FHA does set certain rules, or conditions that must be met before they will provide their insurance for a loan. These rules range from the minimum amount of down payment a buyer must have, to the maximum loan amount for a given type of property in a particular county. NOTE, that FHA doesn’t care how much the purchase price is; only the amount of the loan, since it’s only a portion of that loan they are insuring.

Now, one of the rules that the FHA has is commonly called the “90-Day Seasoning” rule. In fact, the formal name of this rule is, “FR-4615 Prohibition of Property Flipping in HUD’s Singe Family Mortgage Insurance Programs.”

To quote from HUD’s news release, HUD No. 03-055 dated May 1, 2003, this rule, “makes recently flipped properties ineligible for FHA mortgage insurance.”

You should also know, that in this news release, HUD says, “Property ‘flipping’ occurs when a recently acquired property is resold for a considerable profit with an artificially inflated value.” (Bold emphasis added)

In other words, it’s HUD’s opinion, that people who buy, or otherwise acquire a parcel of real estate and sell it for a so-called “considerable profit,” are somehow doing something improper or illegal, and are creating an, “artificially inflated value.” Unfortunately, HUD’s understanding of the term “considerable profit” is unknown since they don’t provide its definition.

More interesting, is HUD’s creation of an arbitrary 90-day period between the date of acquisition and the date of the contract of sale. I guess we are to believe, that if a house is sold on the 91st day after a house is bought it’s no longer being “flipped”? Unfortunately, after extensive research, no where in any documentation have I come upon a HUD definition of the term “flip.”

In fact, the closest thing to a definition for “flip” or “flipping” that I found, is in the published testimony of Susan Gaffney, Inspector General in her testimony before the US Senate Permanent Subcommittee on Investigations, Committee on Governmental Affairs on June 30, 2000. In that testimony, Ms. Gaffney said, “Now let me turn to the phenomenon of property flipping. Buying a home at a low price and then reselling it at an inflated price within a short time frame, often after making only cosmetic improvements to the property, is in and of itself not illegal.” She went on to say, “What makes a property flip illegal is when there is something amiss in the transaction.”

So, based HUD’s arbitrary interpretation of undefined terms, they will not provide insurance to a lender on a property that was bought sooner than an arbitrary 90-days from the seller’s acquisition date.

Now, let’s look at how this (stupid and arbitrarily created) rule actually impacts REAL people, especially in today’s market.

First, as a result of numerous foreclosures, there is a substantial oversupply of homes in many major real estate markets in the US. Ergo, common sense that tells us it would be a good thing for the market to absorb these homes as quickly as possible in order to buoy home prices and help stem the tide of additional foreclosures.

Second, as buyers (a large percentage of which are first time buyers being lured by the previous and extended home buyer tax credits) stick their collective big toe back into the water that is the real estate market, they are coming upon homes that were bought out of foreclosure by entrepreneurs who have, in many cases, invested substantial sums of money in renovations and/or rehabilitations to make these homes marketable. Many of these homes are also being offered at very competitive prices with homes that are being offered for sale by homeowners in traditional non-foreclosure and non-short-sale situations.

However, since many of these buyers are required by economic circumstance to finance using the FHA, the 90-day “no flip” rule is forcing many of these buyers into two equally bad situations:

1. Either they are unable to buy because the house has not been owned for a full 90 days and the seller will not enter into a contract with them, so they must wait and hope a buyer with conventional mortgage financing doesn’t buy the home in the interim, or

2. They enter into a contract earlier than 90 days from the date of the seller’s acquisition, then enter into a second contract on the 91st day after the seller’s date of acquisition.

While number 2 sounds like a reasonably viable solution, it also comes with one very big problem, which is, at closing, the parties must sign a sworn statement that says there has been no other contract on the property within the 90 days since the seller’s acquisition of the property. Consequently, if either party signs such a statement, they are committing MORTGAGE FRAUD!

Unfortunately, many buyers and sellers are entering into contracts which provide for FHA insured financing prior to the 90 day waiting period, either through their ignorance of the rule, or by encouragement of a real estate agent who is either equally ignorant, or who is betting that no one will ever find out (which is more likely the situation).

Oddly enough, this entire dilemma can be eliminated, if HUD would rescind, or provide a specific exemption to their 90-day no-flip rule. And, it wouldn’t be the first time they’ve done so.

In fact, HUD has provided an exemption to this rule for lenders who are selling foreclosed property. So, why can’t they provide an exemption to transactions where the present owner has bought a home out of foreclosure for the sole purpose of renovating and/or rehabilitating the home for resale?

And, speaking as an appraiser, let’s remember, that the home must still be appraised by an appraiser in compliance with FHA requirements.

So, where’s the down side?

The seller turns the house over in a shorter period of time which provides them the capital to buy more foreclosed homes which more quickly reduces the inventory of foreclosed homes and buoys the prices of homes in that market.

More buyers would be able to buy the home of their choice, rather than being discouraged from entering the market through disappointment.

And, mortgage fraud by those buyers and sellers who are now ignoring HUD’s 90-day no flip rule wouldn’t be committing criminal acts (intentionally, or otherwise).

Again. Where’s the down side?

If the federal government actually wants to revive the housing sector of the economy, rescinding the HUD 90-day no flip rule would be a no-brainer.

What do you think?

This entry was posted on Sunday, January 10th, 2010 at 1:56 PM and is filed under Mortgage Related, The Economy, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.