FHA halts 90-day "flip rule" for one year

business
FHA halts 90-day "flip rule" for one year
By Tom LaRocque
Special to The Denver Post
Posted: 02/07/2010 01:00:00 AM MST

Real estate investor Mike Duever, checking out a home in Aurora on Tuesday, welcomes the change. "It speaks to the importance of the investors in helping to revive the market," he says. (Hyoung Chang, The Denver Post )

Real estate investor Mike Duever bought a two-bedroom ranch home in north Denver last fall. Last week, three and a half months after purchasing the property, he sold it to a young couple who are now happily settling in.

With that buy-sell schedule, Duever satisfied a minimum requirement long held by the Federal Housing Administration. Short-term investors had to hold a property at least 90 days before selling to an FHA-backed borrower.

That is, until recently. The FHA on Monday temporarily suspended its 90-day "flip rule." The aim is to "facilitate the return of repaired and habitable properties to the market in a timely fashion," according to an announcement by the U.S. Department of Housing and Urban Development.

"I was happy and surprised to see the change," said Duever, reflecting the sentiments of many investors. "It speaks to the importance of the investors in helping to revive the market."

Duever has bought and sold properties around Denver since 2003, he said.

The 90-day restriction was written originally to impede investors from colluding with appraisers and lenders to push up prices. Investors have long argued that such collusion is not inherent to flipping of properties — it is loan fraud, and it's already illegal.

"All other guidance concerning property-flipping remains unchanged," said the HUD announcement. The suspension will last one year unless it is extended further.

Brad Podhajsky, an investor and licensed broker, leads the Investors Realty Resource, based in Greenwood Village. He echoes sentiments in favor of lifting the restriction.

"Many, maybe most, investor properties are listed through the (Multiple Listing Service), so Realtors will benefit too," Podhajsky said. Homes sold through a MLS generate commission sales for brokers.

The 90-day limit is waived only if the property has "no pattern of previous flipping" in the past 12 months.

If the new sale price exceeds the recent purchase price by 20 percent or more, the lender must be prepared to justify the mark-up with a file documenting the renovations.

The FHA policy shift nearly coincides with a move in the opposite direction affecting conventional (non-FHA) borrowers. The countervailing measure comes from Fannie Mae and Freddie Mac, the government-sponsored enterprises that repurchase most conventional loans.

Beginning April 1, conventional borrowers may purchase properties only if they have been held for 90 days. Excepted from that rule will be borrowers with down payments of 20 percent or more.

One financial-services-industry watcher contends that neither of the rule changes will have much practical significance.

"It's much ado about nothing," said Brian Brady, managing director of Worldwide Credit Corp., based in San Diego. Brady writes the Mortgage Rates Report blog.

Conventional lenders today are more conservative than they're required to be, he said. The same will be true for FHA lenders, he predicted.

"My best guess is that while HUD will be willing to insure loans for properties sold in less than 90 days, lenders generally won't make those loans. If they do, they'll charge higher interest rates to offset the risk," he said.

Conventional lenders backed by Fannie Mae will have no quarrel with the 90-day minimum, he said, "because that's what they're already doing."

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