FHA to Home Flippers: Keep On Rolling

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NEW YORK (MainStreet) -- The U.S. Federal Housing Administration has recently kept a sharp eye on those ubiquitous house flippers – homebuyers who snap up properties, shine them up and sell them for a quick profit.

The FHA has decided to give flippers a break, and extend further a 2010 waiver that allows them to keep getting insurance on homes that are bought and resold in 90 days. The waiver now will stay in effect through 2012.

The extended FHA waiver is forged in the realities of the U.S. housing market. With foreclosures still high, and home prices still volatile, the FHA figures the market needs all the buyers it can get – even those who don’t plan on ever living in the homes they buy.

The move is not without some risk. Studies have shown that home flippers have a direct, and negative impact on the housing market collapse of 2008. The Federal Reserve Bank of New York released a study this month that shows home flippers played a disproportionate role in the real estate meltdown in four hard-hit states: Nevada, Arizona, California and Florida.

The New York Federal Reserve says that home mortgages are more likely to default when properties are purchased by buyers who don’t live in those properties, or who own multiple properties.

According to the Fed, at the apex of the housing boom (early 2006), approximately 35% of new U.S. home purchases went to buyers who already owned a home. But in those four hard-hit states, that number rose to 45% – up from about 25% in 2000.

The FHA, however, is willing to overlook those numbers, and will extend the waiver that curbed such sales. That waiver, which originated in 2010, was set to expire this month. It suspended rules that restricted the FHA from insuring mortgages on properties bought and sold within a 90-day period.

As the FHA says, the new extension enables buyers to continue to use FHA-insured financing to purchase properties owned by the Department of Housing and Urban Development, bank-owned properties or properties resold through private sales. The agency says it will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

"This extension is intended to accelerate the resale of foreclosed properties in neighborhoods struggling to overcome the possible effects of abandonment and blight," says Acting FHA Commissioner Carol Galante, in a statement. “FHA remains a critical source of mortgage financing and stability and we must make every effort to promote recovery in every responsible way we can.”

The FHA does fire warning shot, of sorts, at home flippers, in the form of these caveats:

  • All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.
  • In cases in which the sales price of the property is 20% or more above the seller’s acquisition cost, the waiver will apply only if the lender meets specific conditions, and documents the justification for the increase in value.
  • The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage for purchase program.

The waiver has already led to 42,000 additional home mortgages since February 2010, the FHA reports, with more than $7 billion in total mortgage principal.

With its waiver extension, the FHA is clearly hoping for more of the same in 2012.

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