FHA relaxing 90-day rule covering loans for 'flipped' foreclosures
WASHINGTON — Call it three birds with one stone: The federal government hopes to help low-down-payment home buyers, investors who fix up foreclosures, and local communities burdened with too many bank-owned and foreclosed homes — all with one policy change.
The Federal Housing Administration is revising its long-standing "antiflipping" rules starting Monday. For years, the FHA would not insure a mortgage on a house the seller had owned for fewer than 90 days. The policy was a reaction to fraudulent quick flips of houses that inflated their values far beyond true market worth.
The flips often were pure cons: Buyer A would acquire a low-cost house in bad repair, do minor cosmetic changes and resell within days at a significantly higher price to Buyer B, who was also part of the scheme. The sequence could involve a string of serial flippers within a month or two, with trumped-up prices spiraling into the thousands.
The end game usually went like this: Find a hapless purchaser for the flipped house who would apply for a low-down-payment FHA loan. Typically that buyer defaulted quickly — leaving FHA with a foreclosed house on its books and a loss to its insurance funds.
FHA maintained its 90-day antiflipping rule through much of the last decade. But now it's suspending the policy, at least for the next year. In an advisory to lenders, FHA commissioner David H. Stevens said the agency will provide mortgage insurance for some purchases where the seller had closed on the property fewer than 90 days earlier.
The objective, said Stevens, will be to speed up sales of renovated houses to first-time and other purchasers. With foreclosures at record levels, many communities are faced with excesses of bank-owned properties sitting unsold, often in poor repair.
By waiving the 90-day rule, private investors will be more likely to bid on these houses, fix them up and sell them to buyers who will now be able to gain early access to FHA financing, which offers 3.5 percent down payments.
What's the significance of 90 days? It's huge, say investors who specialize in acquiring and renovating foreclosures and bank-owned properties. Paul Wylie, an investor active in the Los Angeles area, says his group generally can acquire and rehab a house and list it for resale within 60 days.
But under FHA's previous policy, large numbers of potential purchasers couldn't bid on Wylie's properties as they hit the market. Barred from using low-down-payment loans until after 90 days, these buyers were forced to look to conventional mortgage sources, which often required 10 percent down plus private mortgage insurance.
Bobby Taylor, a broker with Coldwell Banker Mountain West Real Estate in Salem, Ore., said FHA's change of heart "is going to be absolutely terrific" for anyone looking to bid on a moderate-priced post-foreclosure house in good physical condition. Some lucky buyers will be able to combine the $8,000 federal tax credit with 3.5 percent FHA financing — provided their contracts are signed by April 30 and closed by June 30, when the credit program expires.
FHA's revised policy does not throw open the floodgates to all post-foreclosure renovations, however. Stevens laid down two key restrictions designed to protect end buyers and FHA alike:
• There can't be game-playing or conflicts of interest among buyers, sellers, realty agents or others involved in the deal. "All transactions must be arm's-length, with no identity of interest" among any of the participants.
• Price runups must be relatively modest and justifiable from the time of the investor's acquisition to what's paid by the applicant seeking FHA financing. Generally the limit will be 20 percent.
When the price jump exceeds 20 percent, FHA expects participating lenders to require extensive documentation of the renovation expenditures made by the investors to justify the hefty price increase. Lenders also are required to order an independent property inspection so the purchaser can understand the house's physical condition and the improvements made.
The takeaway for buyers and investors: Check out FHA financing early on foreclosure turnarounds. It's available and it might work for you.
CORRECTION: To qualify for the $6,500 housing tax credit, purchase contracts may be signed before Nov. 7, 2009, provided the closing occurs after that date. In my Jan. 23 column I said purchase contracts must be dated Nov. 7, 2009, or later.
Ken Harney can be reached at email@example.com.