FHA Finalizes “Anti-flipping Fraud” Rules
by Kenneth R. Harney
|Real estate flippers got a new set of marching orders last week — at least those flippers who want to use FHA mortgage financing.The Federal Housing Administration issued long-awaited final regulations on property flips last Wednesday. The rules take effect nationwide July 7. Flipping involves resales of houses or other real estate shortly after acquisition, typically at a substantial price markup. Say you buy a rundown rowhouse at a bargain price, do cosmetic fixups, and then sell it a month later for twice what you paid for it.
Sounds like a high payoff short-term investment, right? It is. But the FHA found that too many property flips using its insured mortgage program involved outright fraud — hyped appraisals, shell games where property flippers never actually took legal title to the house before selling it for huge profits, sometimes overnight.
Often the end purchaser of the flipped property was not financially qualified, and used fraudulent income, employment and assets information to obtain the FHA loan. Then the buyer quickly defaulted, leaving FHA with insurance losses and a house that was worth nowhere near its appraisal valuation. The flipper, meanwhile, pocketed all the sales proceeds financed with the FHA mortgage.
To rein in such practices, FHA proposed — and last week adopted in final form — new restrictions. Specifically, FHA will now require that:
The FHA 90-day no-flip time restrictions will be waived when the sellers of properties to be financed are:
Real estate investors, particularly those who specialize in rehabilitations of rundown structures in central city areas, had complained to HUD about possible negative impacts on their business activities stemming from the new rules. But HUD decided that banning most 90-day or under flips, and by scrutinizing flips between 91 and 180 days of acquisition where the price markup exceeded 100 percent, FHA should be able to protect itself against the worst abuses.
Investors with questions about the new regulations can call 1-800-CALL FHA for guidance. The rules are contained in HUD Mortgagee Letter 2006-14 , issued June 8.
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