A common misconception is that the FHA makes loans. They don’t. They insure loans. And FHA Loans are all about risk tolerance. If there is the slightest chance of rain, they’re off the field and back into the dugout.
One real estate arena where they have recently made their presence and power known is in the purchase of homes from flippers. The Department of Housing and Urban Development (HUD) put a federal regulation into place to protect home buyers from what they are terming “the predatory real estate lending practice called “flipping” on mortgages insured by the Federal Housing Administration (FHA).”
Known as the anti-flipping rule it makes recently flipped properties (those owned by the flipper for less than 90 days) ineligible for FHA mortgage financing. This protects home buyers because a property purchased by a flipper (which is typically rehabilitated to a degree) can sometimes be quickly resold at a significant profit but at an artificially inflated price.
Interestingly enough, with all the properties that are ripe for flipping and all the lenders that could potentially offer non-FHA loans, in our research we’ve only found one lender who will lend in this scenario and to date they have not closed a single one of these deals.
The thing is…lenders have just not embraced the pulling of the anti-flipping rule because it now goes against everything FHA has stood for. When the market was flying high, FHA stood firm with the anti-flipping rule so flippers had to seek subprime mortgages to finance these properties.
So now, lenders are a little leery because of the mixed messages HUD is sending. HUD has finally brought the hammer down and actually ejected the players who have been playing fast and loose with FHA loans. But it is a little confusing to lenders as property flipping is an arena ripe with opportunities to break the rules.
I believe that the main reason FHA did this was to allow those true rehabbers to make homes “FHA ready” for home buyers who do not have the resources to bring the home up to FHA codes. With the growing inventory of foreclosed properties sitting empty, these homes can fall into disrepair and not pass FHA inspections. So these “flippers with a heart” are actually taking a number of homes that would never go FHA and getting them in the game.
So we’ll see what happens when the ever-increasing shadow inventory hits the market if these constraints lighten up due to the new glut of homes for sale. The anti-flipping rule may be the panacea that will change the market or it may just be a temporary change until a new wave hits and sends us in another direction.