Federal Housing Administration (FHA)-Temporary Exemption From Compliance With FHA's Regulation on Property Flipping, 28632-28634 [2010-12148]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 75, Number 98 (Friday, May 21, 2010)]
[Notices]
[Pages 28632-28634]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-12148]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5397-N-01]
RIN 2502-ZA05


Federal Housing Administration (FHA)--Temporary Exemption From 
Compliance With FHA's Regulation on Property Flipping

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Notice.

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SUMMARY: This notice announces that FHA has waived its regulation that 
prohibits the use of FHA financing to purchase properties that are 
being resold within 90 days of the previous acquisition. Prior to the 
waiver of this regulation, which took effect for all sales contracts 
executed on or after February 1, 2010, a mortgage was not eligible for 
FHA insurance if the contract of sale for the purchase of the property 
that is the subject of the mortgage is executed within 90 days of the 
prior acquisition by the seller and the seller does not come under any 
of the exemptions to this 90-day period that are specified in the 
regulation. During this period of high foreclosures, FHA seeks to 
encourage investors that specialize in acquiring and renovating 
properties to renovate foreclosed and abandoned homes with the 
objective of increasing the availability of affordable homes for first-
time and other purchasers and helping to stabilize real estate prices 
as well as neighborhoods and communities where foreclosure activity has 
been high. While the waiver is granted for the purpose of stimulating 
rehabilitation of foreclosed and abandoned homes, the waiver is 
applicable to all properties being resold within the 90-day period 
after prior acquisition, and is not limited to foreclosed properties.
    The waiver, however, has conditions, and eligible mortgages must 
meet the conditions specified in this notice. Additionally, the waiver 
is not applicable to mortgages insured under HUD's Home Equity 
Conversion Mortgage (HECM) Program.
    Although the waiver is currently in effect, HUD seeks comments from 
industry, potential purchasers, and other interested members of the 
public on the conditions which must be met for the waiver to be 
provided. Comments will be taken into consideration in determining 
whether any modifications should be made to the waiver eligibility 
conditions.

DATES: Effective Date: February 1, 2010 through February 1, 2011.
    Comment Due Date. June 21, 2010.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, 451 
7th Street, SW., Room 10276, Department of Housing and Urban 
Development, Washington, DC 20410-0500. Communications must refer to 
the above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
https://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit a comment, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
https://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note:  To receive consideration as public comments, comments 
must be submitted through one of the two methods specified above. 
Again, all submissions must refer to the docket number and title of 
the rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the 
above address. Due to security measures at the HUD Headquarters 
building, an advance appointment to review the public comments must be 
scheduled by calling the Regulations Division at 202-708-3055 (this is 
not a toll-free number). Individuals with speech or hearing

[[Page 28633]]

impairments may access this number through TTY by calling the Federal 
Information Relay Service at 800-877-8339. Copies of all comments 
submitted are available for inspection and downloading at https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Margaret E. Burns, Director, Office of 
Single Family Program Development, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street, SW., Washington, DC 
20410-8000; telephone number 202-708-2121 (this is not a toll-free 
number). Persons with hearing or speech impairments may access this 
number through TTY by calling the toll-free Federal Information Relay 
Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 203.37a(b)(2) of HUD's regulations (24 CFR 203.37a(b)(2)) 
establishes FHA's rule on property flipping and this section provides 
that FHA will not insure a mortgage for a property if the contract of 
sale is executed within 90 days of the acquisition of the property by 
the seller. Section 203.37a(c) lists the sales transactions that are 
exempt from this rule. The exempt transactions include, for example, 
sales by HUD of real estate-owned (REO) properties under HUD's 
regulations in 24 CFR part 291, sales by another federal agency of REO 
properties, sales of properties by nonprofit organizations that have 
been approved to purchase and resell HUD REO properties, and sales by 
state- and federally-charted financial institutions and government 
sponsored enterprises, to name a few.
    Property ``flipping'' refers to the practice whereby a property 
recently acquired is resold for a considerable profit with an 
artificially inflated value, often the result of a lender's collusion 
with the appraiser. Most property flipping occurs within a matter of 
days after acquisition, and usually with only minor cosmetic 
improvements, if any. In an effort to preclude this predatory lending 
practice with respect to mortgages insured by FHA, HUD issued a final 
rule on May 1, 2003 (68 FR 23370) that provides in 24 CFR 203.37a that 
FHA will not insure a mortgage if the contract of sale for the purchase 
of the property that is the subject of the mortgage is executed within 
90 days of the prior acquisition by the seller and the seller does not 
come under any of the exemptions to this 90-day period that are 
specified in Sec.  203.37a(c). In a final rule published on June 7, 
2006 (71 FR 33138), HUD expanded the exceptions contained in Sec.  
203.37a(c) to the 90-day time restrictions to include such transactions 
as sales of single family properties by government-sponsored 
enterprises (GSEs), state- and federally-chartered financial 
institutions, nonprofits organizations approved to purchase HUD Real 
Estate-Owned (REO) single family properties at a discount with resale 
restrictions, local and state governments and their instrumentalities, 
and, upon announcement by HUD through issuance of a notice, sales of 
properties in areas designated by the President as federal disaster 
areas.
    The downturn in the housing market over the last two years has seen 
a rapid rise of homeowners defaulting on mortgages and consequently a 
rise in foreclosed homes. A variety of measures to avoid foreclosures 
have been initiated at the federal, state and local level, most notably 
the Administration's Home Affordable Modification Program. Despite 
these efforts to keep families in their homes, foreclosures remain high 
and not only do foreclosures affect the families that lost their homes, 
but they affect neighborhoods and communities. While HUD continues its 
efforts to help homeowners remain in their homes, through waiver of its 
regulation on property flipping, HUD seeks to help stabilize 
neighborhoods and communities.
    HUD undertook similar waiver action in a narrower context in 2009, 
regarding HUD's Neighborhood Stabilization Program (NSP). NSP, a 
temporary program authorized by the Housing and Economic Recovery Act 
2008 (Pub. L. 110-289, approved July 30, 2008), was established for the 
purpose of stabilizing communities that have suffered from foreclosures 
and abandonment, by allocating funds through a formula to States and 
units of general local government, for the purchase and redevelopment 
of foreclosed and abandoned homes and residential properties. HUD's 
waiver of its regulation on property flipping for NSP removed an 
impediment to the purchase of affordable homes that had been 
rehabilitated and sold under this program. With the home foreclosure 
rate remaining high across the nation, HUD has determined that a 
temporary waiver of this regulation on a nationwide basis, subject to 
certain conditions, may contribute to stabilizing real estate prices 
and neighborhoods that have been heavily impacted by foreclosures. The 
waiver of the regulation may facilitate the sale and occupancy of 
foreclosed homes that have been rehabilitated by making the mortgages 
of such homes eligible for FHA mortgage insurance. Again, however, 
while the waiver is granted for the purpose of stimulating 
rehabilitation of foreclosed and abandoned homes, the waiver is 
applicable to all properties being resold within the 90-day period 
after prior acquisition. The waiver is not limited to the resale of 
foreclosed properties.

II. Eligibility for Waiver of 24 CFR 203.37a(b)(2)

    To be eligible for the waiver of the Property Flipping Rule, an 
FHA-approved mortgagee must meet the following conditions:
    1. All transactions must be arms-length, with no identity of 
interest between the buyer and seller or other parties participating in 
the sales transaction. Some ways that the lender can ensure that there 
is no inappropriate collusion or agreement between parties, are to 
assess and determine the following:
    a. The seller holds title to the property;
    b. Limited liability companies, corporations, or trusts that are 
serving as sellers were established and are operated in accordance with 
applicable state and federal law;
    c. No pattern of previous flipping activity exists for the subject 
property as evidenced by multiple title transfers within a 12 month 
time frame (chain of title information for the subject property can be 
found in the appraisal report);
    d. The property was marketed openly and fairly, through a multiple 
listing service (MLS), auction, for sale by owner offering, or 
developer marketing (any sales contracts that refer to an ``assignment 
of contract of sale,'' which represents a special arrangement between 
seller and buyer may be a red flag).
    2. In cases in which the sales of the property is greater than 20 
percent above the seller's acquisition cost, an FHA-approved mortgagee 
is eligible for the waiver only if, the mortgagee:
    a. Justifies the increase in value by retaining in the loan file 
supporting documentation and/or a second appraisal, which verifies that 
the seller has completed sufficient legitimate renovation, repair, and 
rehabilitation work on the subject property to substantiate the 
increase in value or, in cases where no such work is performed, the 
appraiser provides appropriate explanation of the increase in property 
value since the prior title transfer; and
    b. Orders a property inspection and provides the inspection report 
to the purchaser before closing. The mortgagee may charge the borrower 
for this inspection. The use of FHA-approved inspectors or 203(k) 
consultants is not

[[Page 28634]]

required. The inspector must have no interest in the property or 
relationship with the seller, and must not receive compensation for the 
inspection for any party other than the mortgagee. Additionally, the 
inspector may not: compensate anyone for the referral of the 
inspection; receive any compensation for referring or recommending 
contractors to perform any repairs recommended by the inspection; or be 
involved with performing any repairs recommended by the inspection. At 
a minimum, the inspection must include:
    i. The property structure, including the foundation, floor, 
ceiling, walls and roof;
    ii. The exterior, including siding, doors, windows, appurtenant 
structures such as decks and balconies, walkways and driveways.
    iii The roofing, plumbing systems, electrical systems, heating and 
air conditioning systems;
    iv. All interiors; and
    v. All insulation and ventilation systems, as well as fireplaces 
and solid fuel-burning appliances.
    3. Only forward mortgages are eligible for the waiver. Mortgages 
insured under HUD's HECM program are ineligible for the waiver.

III. Compliance With the Paperwork Reduction Act

    The information collection requirements applicable to this waiver 
have been submitted to the Office of Management and Budget (OMB) under 
the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned 
OMB Control No. 2502-0059. In accordance with the Paperwork Reduction 
Act, an agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information, unless the collection 
displays a currently valid OMB control number.

IV. Period of Waiver Eligibility

    This waiver announced by this notice became effective February 1, 
2010, and shall expire for all sales contract entered into after 
February 1, 2011, unless extended or withdrawn by HUD. By notice, HUD 
shall notify the public of any extension or withdrawal of this waiver. 
If as a result of this waiver, there is a significant increase in 
defaults on FHA-insured mortgages and an increase in mortgage insurance 
claims that are attributable to mortgages insured as a result of 
exercise of this waiver authority, HUD may withdraw this waiver 
immediately.

V. Solicitation of Public Comments

    HUD welcomes comments on the conditions specified in this notice 
for eligibility for waiver of its regulation on property flipping. As 
stated in the Summary, comments will be taken into consideration in 
determining whether any modifications should be made to the waiver 
eligibility conditions.

    Dated: May 12, 2010.
David H. Stevens,
Assistant Secretary for Housing-- Federal Housing Commissioner.
[FR Doc. 2010-12148 Filed 5-20-10; 8:45 am]
BILLING CODE 4210-67-P