Home/Mortgages/HUD Extends Foreclosure Anti-Flipping Rule

January 24, 2011 (Shirley Allen)
The Department of Housing and Urban Development (HUD) announced that it is in the process of approving another one-year suspension of its anti-flipping rule on foreclosed properties bought with FHA loans. The suspension was first initiated on February 1st of last year to allow investors to quickly renovate foreclosed homes and selling them to first time buyers as a means to further sales of foreclosed properties.

In 2003, HUD issued a rule that prohibits the FHA from insuring a mortgage on a home that was owned by the seller for less than 90 days. HUD initiated the anti-flipping rule early last decade because the Federal Housing Authority (FHA) discovered that too many of these quick sales were made at grossly inflated prices and involved fraudulent activities.

“HUD believes that short re-sales executed within 90 days imply pre-arranged transactions that often prove to be among the most egregious examples of predatory lending practices,” the final rule said.

In suspending the anti-flipping rule last February, HUD required that all sales must be “arms length” transactions, meaning there cannot be a shared interest between the buyer and the seller. And the lender has to meet specific conditions if the price of the property is 20% or more above the seller’s acquisition cost.

“FHA borrowers, because of the restrictions, have often been shut out from buying affordable properties,” HUD Secretary Shaun Donovan said last January.

As foreclosure inventory started piling up in 2009, investors claimed the 90-day restriction prevented them from quickly renovating foreclosed homes and selling them to first-time homebuyers. Donovan agreed and initiated the suspension.

The HUD spokesman said the rule was currently in the clearance process. When the FHA first lifted the ban, HUD announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofits looking to clear out vacant and abandoned homes.

Tags: HUD, FHA, FHA loans, foreclosed properties, mortgage, fraud, anti-flipping rule, predatory lending practices, borrowers