Perpetrators of flipping schemes will soon face burdensome regulations designed to restrict the practice, thanks to a final rule issued by the U.S. Department of Housing and Urban Development (HUD).
The predatory lending practice usually involves the resale of recently purchased property at an inflated price. Appraisers and lenders often cooperate in the fraud. The agency began researching ways to restrict this predatory lending practice in September 2001.
The Mortgage Bankers Association of America (MBA) issued a statement supporting the rule. "MBA looks forward to working constructively with the Federal Housing Administration (FHA) on implementing the rule so that it fulfills its intended purpose without unduly burdening responsible lenders," stated Kurt Pfotenhauer, senior vice president of government affairs, in the release.
The new rule, which will take effect June 2, bans 'rapidly resold' properties from aquiring FHA-insured mortgage financing. Under the rule, single-family housing units must stay on the market for 91 days before access to the financing eases.
Between 91 and 180 days, some restrictions still apply and extra documentation, such as a second supporting appraisal, is required from the lender in order to complete the transaction. This rule would kick in if the resale price is 100 percent above the original purchase price.
The HUD rule also allows for regulation of resales that occur within the first 12 months of ownership if the new selling price is five percent higher than the original purchase price. The HUD rule states that this oversight is an option if the agency has reason to believe the transaction is fraudulent.
Some transactions are exempt from the regulation, including HUD owned REO properties under 24 CFR part 291 and single family assets in revitalization areas pursuant to section 204 of the National Housing Act. Also, some properties involved in employee relocation can be transferred without submitting to the new regulation.