Original document prepared by former Worldwide ERC® General Counsel Richard H. Mansfield III
Mansfield & Mansfield
Updated by Worldwide ERC® Government Affairs Adviser, Tristan North
Current as of January, 2017
In 2003, HUD published rules regarding FHA mortgages which were designed to prohibit “flipping” of those properties. Flipping occurs when a speculator contracts for the sale of a house, then either resells it prior to the closing date, or shortly thereafter at a price significantly higher than the purchase price. This practice was common in the housing boom period, and was often a product of mortgage fraud.
On June 1, 2003, HUD adopted the final rule amending its mortgage insurance regulations to prevent the practice of flipping properties financed with Federal Housing Administration (FHA) insured mortgages. Under the regulation, FHA requires that 1) only owners of record may sell properties that will be financed with FHA insured mortgages; 2) any resale of a property may not occur 90 or fewer days from the date of the last sale to be eligible for FHA financing; and 3) for re-sales occurring between 91-180 days after the original sale where the new sales price exceeds the previous sales price by 100% or more, FHA will require additional documentation to validate the property’s value. HUD exempted from the property flipping rules those properties sold by HUD through its Real Estate Owned activities, new homes being sold by builders and properties being sold by relocation companies and the property owner’s employer as part of relocation. This latter exemption was the product of Worldwide ERC®’s discussions with HUD during the public comment period before the adoption of the final rule.
As the real estate and credit markets tightened, foreclosures (known as REOs for “real estate owned”), judicial sales, and short sales have become much more common. In addition, because of credit market conditions, FHA mortgages have become much more popular as a financing means. In foreclosures, the bank (or other lender) needs to sell the foreclosed property as soon as possible so as to limit carrying costs. A prolonged period off of the market not only significantly increases the bank’s loss, but also may increase the time the house stays on the market due to deterioration and market exposure.
HUD has been tasked by the federal government with a key role in the weakened housing market, and, in order to make more FHA mortgage insurance funds available, it waived the 90-day requirement for several continuous one-year periods with regard to sales of properties acquired by mortgagees, whether sold directly by the mortgagees or by their subsidiaries or by vendors to whom they have transferred titles to properties for the purpose of effectuating sales of those properties. With the improvement in the housing market, HUD has let the waiver expire. However, the exemption for relocation properties still remains in place.
The waiver was intended to facilitate the issuance of FHA mortgages on foreclosed properties and thereby both help stem banks’ losses on these properties and get foreclosed properties in the hands of new owners. Because the waiver only applies to lenders who foreclose on a property, it still acts as a bar on speculation. While it is not clear in the language of the exemption, any foreclosing mortgagee, such as a second or third lien holder should also be protected, since the exemptions pointedly does not apply solely to purchase mortgagees. However, non-mortgagees were not exempted, and some organizations such as the National Association of REALTORS® (NAR) had urged HUD to exempt from the time restrictions all REO properties sold by any entity that has as its principal business activity the lending or investment of funds in real estate mortgages in order to expand the potential use of FHA mortgages on a wider field of newly foreclosed properties.
While the changes in mortgage underwriting standards have changed due to the collapse of the mortgage market, the anti-flipping regulation is still the law although it sometimes takes additional documentation to the underwriters to show the relocation transaction is in fact covered. Currently, in some cases, HUD underwriters are questioning the ownership requirement in two deed situations; in such cases, which appear to be diminishing, some evidence of the relocation contract is often supplied. The same issue can appear in two deed transactions, where the deeds are dated close in time. Both situations often require the settlement agent to educate the underwriter on the mechanics of a relocation, so that the underwriter understands that the relocation exemption applies to the sale.