Homebuyers relying on FHA-insured financing will still be able to buy homes that have changed hands in the last 90 days, thanks to a decision by the Federal Housing Administration to extend a temporary waiver of its "anti-flipping" rule through the end of the year.
The anti-flipping rule — a 90-day waiting period implemented in 2003 to protect the FHA’s mortgage insurance program from losses — already included an exemption for homes repossessed by Fannie Mae, Freddie Mac, and state- and federally chartered financial institutions.
But last year, FHA took the additional step of waiving the waiting period for all resales — including homes purchased and rehabbed by private investors.
Since the broad waiver went into effect on Feb. 1, 2010, FHA said it has insured 21,000 90-day property flip loans worth more than $3.6 billion that would otherwise not have qualified for financing.
The Obama administration believes the waiver may be helping stabilize home prices and neighborhoods that have been heavily impacted by foreclosures.
An analysis of property-flip loans suggests they carry no more credit risk than others insured by FHA, although they were often missing documentation needed to support valuations, the government said in a notice announcing an extension of the waiver until Dec. 31, 2011.
"This action enables our borrowers, especially first-time buyers, to take advantage of this opportunity and buy a home that has recently been rehabilitated," said FHA Commissioner David Stevens in a statement. "It will also help to move more foreclosed properties off the market and reduce the number of vacant homes in neighborhoods throughout this country."
To protect FHA borrowers against predatory flipping — resales of properties at inflated prices — the waiver continues to be limited to arms-length transactions, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.
In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, lenders must justify the increase with a second appraisal or supporting documentation verifying that the seller has completed renovation, repair and rehabilitation work to substantiate the increase in value.
The lender must also order a property inspection and provide a copy of the report to the purchaser before closing.
In analyzing 17,114 90-day property flip loans insured between Feb. 1, 2010, and Oct. 31, 2010, FHA found the early payment default rate was 0.03 percent — less than the 0.15 percent rate for the 1.2 million purchase loans insured during the same period. Borrower debt ratios and credit scores were also nearly identical.
But a further review of a subset of those loans found they were more likely than other purchase loans to have problems with valuations. Nearly half had unacceptable valuation reviews, with a majority of the problems that were discovered related to documentation compliance issues, such as a missing inspection report or second appraisal.
