The rule was intended to prevent speculators from defrauding the government, but it also stifled the purchase and renovation of foreclosed homes by legitimate investors.For years the federal government prohibited the use of Federal Housing Administration mortgage financing by buyers purchasing homes from sellers who had owned the property for less than 90 days. The idea was to prevent speculators from defrauding the government through quick flips of houses — often involving straw buyers and corrupt appraisers — at wildly inflated prices.
One side effect of that policy had been to stifle purchase-and-renovate projects by legitimate, small-scale investors who buy houses after foreclosure or loan defaults and then resell them in substantially improved condition. In many parts of the country, first-time and moderate-income buyers often sought to buy these fixed-up houses using FHA-insured mortgages with 3.5% down payments, but were prevented from doing so by the "anti-flipping" rule.
This left large numbers of foreclosed, vacant houses sitting unsold and deteriorating, with negative effects on the values of neighboring properties.
Last January, FHA Commissioner David H. Stevens announced a one-year suspension of that rule, permitting qualified buyers to obtain FHA mortgages on properties that were acquired by rehabbers less than 90 days before. The plan, set to expire at the end of this month, came with safeguards for purchasers, including inspections and multiple appraisals in some cases to document the amounts spent by investors on the improvements.
Vicki Bott, deputy assistant secretary for single-family housing at the FHA, confirmed in an interview that the agency expects to continue the policy for another year. Not only have first-time buyers responded overwhelmingly to the opportunity to buy "turnkey" renovated homes with low down payments, she said, but they have performed well on their mortgage obligations.
"Obviously we have concerns about flipping in general," Bott said, but the FHA has seen none of the fraud problems, defaults and re-foreclosures that cost the agency millions in insurance payouts in earlier years.
Investor Paul Wylie, who with a group of partners and contractors specializes in acquiring, renovating and reselling foreclosed and distressed houses in the Los Angeles area, says the government's policy "has been a very positive approach" because "it recognizes the role that [private investors] can play in helping the housing market get back on its feet."
In the L.A. market, Wylie said, FHA financing accounts for 40% of all home purchases and 60% of purchases in predominantly Latino and African American communities.
Buying foreclosed houses "comes with a lot of risk factors," Wylie said. "There's no title insurance. We don't have a good idea of the extent of the defects" inside properties that have been sitting vacant or vandalized for months. Some houses come with delinquent property taxes, which Wylie's group typically must pay.
Then again, the profit opportunities can be significant as well. Most of the Wylie group's houses sell for more than 20% higher prices than Wylie paid at acquisition — a quick turnaround gain that potentially works for buyers, sellers, neighborhoods and, yes, the FHA itself.
Distributed by Washington Post Writers Group
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