HOW WILL HUD’S WAIVER OF THE 90 DAY ANTI-FLIPPING RULE HELP THE HOUSING MARKET?

On January 15, 2010, HUD announced that it would waive (temporarily) its rigid 90 day anti-flipping rule in an effort to jump start the housing market.  This is HUGE news for FHA buyers as well as fix-and-flip real estate investors who sell to FHA buyers.  Whether you’re an investor, real estate agent, or first time homebuyer, the waiver holds tremendous positive implications for you and the Colorado real estate market.

HUD press release

What’s the 90 day anti-flipping rule?

Under HUD’s 90 day anti-flipping rule (also called 90 day seasoning), you cannot buy a property with an FHA loan unless the seller of the property has owned the property for at least 90 days.  In other words, the property needs to have been “seasoned” under the current ownership for at least 90 days.  HUD implemented the rule to protect against mortgage fraud and artificially inflated home prices (and loans) through multiple property flips.

Although the rule thwarted mortgage fraud efforts, it has penalized legitimate investors making it extremely difficult for them to help stabilize home values toward market recovery.  Fix and flip investors are motivated to resell properties as soon as possible after renovations are complete so that they can avoid unnecessary holding costs.   They will often turn down properties that need minor repairs because the holding costs exceed the profit margin.  Those homes also remain unattractive to first time homebuyers because of the need for repairs that the buyers are not equipped to handle.  As a result, many of the homes that could be renovated and sold will simply remain on the market, increasing inventory and lowering home values.

This market glut of distressed homes is compounded by the fact that FHA financing is the funding source for the vast majority of first time homebuyers.  FHA financing has increased  to 40% of all market sales.

What is the temporary waiver and how does it help?

As set forth in its January 15, 2010 announcement, HUD temporarily (for one year) waived the 90 day rule to allow FHA buyers to purchase homes from sellers who have owned the home for less than 90 days.

Now, investors will be motivated to purchase and renovate more properties because they know the buyers will be able to close quickly, thereby reducing the costs and risks of holding the properties for a full 90 days. This is really a win/win situation for the investor and the buyer.  The inventory of distressed properties is reduced and the market for quality affordable housing increases, thereby increasing overall values.

The waiver was effective February 1, 2010 and ends February 1, 2011.  Note that the waiver is not a carte blanche removal of the 90 day anti-flipping rule.  Instead, HUD has issues certain guidelines and conditions to guard against against abuses.  The guidelines are summarized below:

• All sales are to be arms-length transactions.  There should be no relation between buyer, seller or other parties participating in the transaction.
• Sellers must hold title to the property.
• No pattern of previous flipping of property (multiple title transfers in the last `12 months).
• Property must be marketed open and fairly in MLS, Auction, for sale by owner and or developer marketing.
• Sale prices of 20% or more over and above seller’s acquisition cost will require certain back up information, such as appraisal and/or inspections verifying that the increased price is supported by seller’s completion of renovations/repairs.

Read the full text of the guidelines at FHA Waiver Guidelines.