At their recent fall meetings, directors of the California Association of Realtors® (CAR) adopted the following motion:  “That C.A.R. in conjunction with NAR, “SUPPORT” the elimination of the FHA 90-day anti-flipping rule, and that C.A.R. write and publish a letter to the FHA Commissioner in opposition to the FHA 90-day anti-flipping rule.”  While support for the motion was not unanimous, it passed by a significant majority.  Why would CAR oppose the anti-flipping rule?

In a 2006 Mortgagee Letter, the Department of Housing and Urban Development (HUD) described flipping and explained its opposition to it in the following way:  “Property flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.  FHA’s policy prohibiting property flipping eliminates the most egregious examples of predatory flips of properties with the FHA mortgage insurance programs”

The primary component of FHA’s anti-flipping policy is the 90-day rule.  No FHA funding will be provided for properties purchased within 90 days of the seller’s acquisition of the property.  The intent of this policy is to protect buyers from overpaying (and, of course, to protect FHA’s insurance program).  Now, being against that sounds like opposing motherhood and apple pie.

However, proponents of the CAR motion argued that, in the current environment, the effect of the anti-flipping rule was actually to harm potential FHA buyers and to shut them out of the real estate market.

The argument begins with the fact that buyers using FHA financing are less preferable to many sellers than are those who have cash or who are qualified for a conventional loan.  This is especially true in the REO arena (i.e. bank-owned properties that were acquired through foreclosure).  It is common for a listing of an REO property to state that offers with FHA financing will not be considered.  Institutional owners of REOs want faster escrows than can be expected from FHA.  Moreover, it is frequently the case that an REO property will be in poor condition, requiring repairs, and will not pass an FHA appraisal.  Effectively, then, FHA buyers are out of the REO market. 

Some investors buy REOs to hold; others buy to realize a short-term profit.  The latter usually must do rehab work to bring the property into marketable condition.  That work adds value and, of course, the investor(s) will seek to profit from it.  Does that mean the property will be sold for “an artificially inflated value?”  Of course not.  Especially in today’s appraisal environment where it is hard enough to get an appraisal to come in even at market value!  (There will always be fraud, of course; but no set of rules is going to completely overcome that.)

Market realities shut FHA buyers out of the REO market.  With the 90-day rule, they are also shut out of the opportunity to buy a rehabbed house, ones which are being snapped up by buyers – often first-time buyers – who have conventional financing.

During the debate at CAR there were impassioned arguments from agents who had seen their FHA buyers repeatedly excluded from legitimate purchase opportunities.  While opponents of the motion did not deny this, they argued against it for primarily political reasons.  They believed that opposition to the anti-flip policy made the organization (CAR) appear to be in favor of unfair profits being made at the expense of unwary buyers.

The argument about appearances failed to carry, and directors voted to oppose the anti-flipping rule.  Now the organization needs to do what it can to convince FHA.