[Federal Register Volume 76, Number 23 (Thursday, February 3, 2011)]
[Notices]
[Pages 6149-6153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2434]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5397-N-03]
RIN 2502-ZA05


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

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

ACTION: Notice.

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SUMMARY: This notice announces that FHA is extending the availability 
of the temporary waiver of its regulation that prohibits the use of FHA 
financing to purchase single family properties that are being resold 
within 90 days of the previous acquisition, until December 31, 2011. 
This waiver, which was issued in January 2010, took effect for all 
sales contracts executed on or after February 1, 2010, and is set to 
expire on February 1, 2011. Prior to the waiver, 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.
    As a result of the high foreclosures that have been taking place 
across the nation, FHA, through the regulatory waiver, encourages 
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 available for the purpose of stimulating 
rehabilitation of foreclosed and abandoned homes, the waiver is 
applicable to all single family properties being resold within the 90-
day period after prior acquisition, and was not limited to foreclosed 
properties. Additionally, the waiver is subject to certain conditions, 
and eligible mortgages must meet these conditions to take advantage of 
the waiver. The waiver is not applicable to mortgages insured under 
HUD's Home Equity Conversion Mortgage (HECM) Program.
    On May 21, 2010, HUD published a notice that solicited public 
comment on the waiver, and specifically the conditions to which the 
waiver is subject. This notice issued in today's

[[Page 6150]]

edition of the Federal Register not only announces the extension of 
HUD's waiver of its property flipping regulations, but also responds to 
the public comments submitted in response to the May 21, 2010, notice. 
HUD considered the public comments but makes no changes in response to 
these comments. The waiver is therefore extended without change. 
Although no changes are made to the conditions to which the waiver is 
subject, this notice also includes guidance on the waiver conditions in 
response to questions that have arisen from time to time during the 
first year in which the waiver was made available. Additionally, this 
notice again welcomes public comment on the waiver.

DATES: Effective Date: February 1, 2011 through December 31, 2011.
    Comment Due Date: April 4, 2011.

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 
http://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 
http://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 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 http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Karin B. Hill, 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

    In this extension of the waiver, HUD repeats the background, as 
provided in the May 21, 2010 (75 FR 28632), that led to HUD's decision 
to issue the waiver.
    Section 203.37a(b)(2) of HUD's regulations (24 CFR 203.37a(b)(2)) 
establishes FHA's rule on property flipping and this regulatory section 
provides that FHA will not insure a mortgage for a single family 
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 past few years has led 
to a rapid rise of homeowners defaulting on mortgages, and consequently 
an increase 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 
continue to 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.
    As noted in its May 21, 2010, notice, 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 (Public Law 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

[[Page 6151]]

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 determined, early in 2010, 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, and 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.
    During the first year in which the waiver was made available, HUD 
believes that the waiver has made such a contribution and is therefore 
extending the waiver until December 31, 2011. As more fully discussed 
in the appendix to this notice, the waiver has enabled FHA to insure 
17,114 mortgages that would not have been eligible otherwise for FHA 
insurance. In addition, overall HUD real estate owned (REO) purchases 
and investor purchases have increased by 20 and 25 percent, 
respectively. For the loans that FHA insured during the first year of 
the waiver, FHA compared the credit profile of 90-day property flip 
loans with other loan purchases (less HECM) to determine if the credit 
profiles were similar. FHA 90 day property flip loans and other 
purchase loans are almost identical from a credit perspective.
    For 2011, FHA expects its foreclosure inventory to increase by 50 
percent. Home prices declined for a third month (including distressed 
sales) by 3.93 percent in October 2010, compared to a year ago. The 
distressed sale share remains at 28 percent. The shadow inventory (90+ 
delinquencies, foreclosures and REOs not listed for sale) is estimated 
between 2 to 4 million units. As a result, the housing inventory is 
expected to remain elevated for some time. HUD provides a more detailed 
discussion of its assessment of granting the waiver in 2010, in the 
appendix to this notice.
    While the waiver remains available for the purpose of stimulating 
rehabilitation of foreclosed and abandoned homes for another calendar 
year, the waiver continues to remain 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. Discussion of the Public Comments Received in Response to the May 
21, 2010, Notice

    In the May 21, 2010, notice, HUD solicited comments from industry, 
potential purchasers, and other interested members of the public on the 
conditions that must be met for the waiver to be provided. The public 
comment period closed June 21, 2010, and eight public comments were 
received in response. After careful consideration of the comments, HUD 
decided to make no changes to the waiver eligibility conditions. For 
the convenience of the readers, the waiver eligibility conditions are 
set forth in Section III, followed by guidance on these conditions in 
Section IV.
    The following presents a summary of the significant issues raised 
by the comments in response to the May 21, 2010, notice, and HUD's 
responses.
    Comment: Support for waiver. The majority of the commenters 
supported the waiver. These commenters wrote that the anti-flipping 
regulation delays bringing affordable properties back on the market. 
Several of the commenters requested that FHA make the exemption 
permanent for transactions that meet the eligibility criteria specified 
in the notice.
    HUD Response. HUD appreciates the support expressed by these 
commenters, and agrees that the waiver will help to stabilize 
neighborhoods and communities. With respect to those commenters 
advocating that the exemption be made permanent, HUD is not prepared at 
this time to permanently remove the resale ``property flipping'' 
restrictions from its regulation.
    Comment: Opposition to waiver. Two commenters expressed the view 
that the waiver was not in the interest of homebuyers or the American 
taxpayer. The commenters wrote that the waiver of the property flipping 
guidelines will hurt homebuyers by permitting investors to purchase and 
quickly resell properties at inflated value ``with little more than 
fresh paint and a general cleaning.''
    HUD Response. As noted, HUD will grant waivers only if the 
mortgagee can meet certain specified conditions designed to address the 
concerns raised by the commenters. Among other conditions, the 
mortgagee must demonstrate that the purchase transaction is arms-length 
in nature, that the property has not been the subject of prior 
``flipping,'' and that the property was fairly and openly marketed for 
sale. Further, the mortgagee must justify and document any sales price 
that exceeds the seller's acquisition costs by 20 percent or more.
    Comment: Clarify seller acquisition cost. Several commenters urged 
that HUD clarify that the seller's acquisition cost excludes any costs 
of rehabilitation. The commenters wrote that the 20 percent limit does 
not account for the high cost of the extensive repairs frequently 
needed to place abandoned or foreclosed properties on the market.
    HUD Response. The waiver eligibility conditions sufficiently 
address the concerns raised by the commenters. Specifically, the 
eligibility conditions do not prohibit resales that exceed 20 percent 
of the seller's acquisition costs but, rather, simply require the 
mortgagee to justify and document the reasons for the increase in 
value. As noted above, such reasons may include the completion of 
sufficient legitimate renovation, repair, and rehabilitation work.

III. 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 sale 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 sale 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

[[Page 6152]]

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 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.

IV. Guidance on the Conditions for Waiver Eligibility

A. Seller's Acquisition Cost

    The seller's acquisition cost is the purchase price which the 
seller paid for the property, and the following costs (if paid by the 
seller):
     Closing costs, plus
     Prepaid costs, including commissions.
    The seller's acquisition cost does not include the cost of repairs 
that the seller makes to the property.

B. Justification and Documentation of Increase in Value

    If the resale price of the property is greater than 20 percent 
above the seller's acquisition cost, the property will be eligible for 
an FHA-insured mortgage only if the Mortgagee justifies the increase in 
value. The Mortgagee must verify that the seller has completed 
sufficient legitimate renovation, repair, or rehabilitation work on the 
subject property to substantiate the increase in value by retaining 
supporting documentation in the loan file or by providing a second 
appraisal.
     If the Mortgagee uses a second appraisal:
    [cir] An FHA roster appraiser must perform the appraisal in 
compliance with all FHA appraisal reporting requirements.
    [cir] The Mortgagee may not use an appraisal done for a 
conventional loan even if it was completed by an FHA roster appraiser.
    [cir] The Mortgagee may not charge the cost of the second appraisal 
to the homebuyer.
    If the Mortgagee has ordered a second appraisal to document the 
increase in value, the Mortgagee must not use this appraisal for case 
processing and must not enter it into FHA Connection.

C. Property Inspection Report

    If the resale price of the property is greater than 20 percent 
above the seller's acquisition cost, the property will be eligible for 
an FHA-insured mortgage only if the Mortgagee obtains a property 
inspection and provides the inspection report to the buyer before 
closing. The borrower, lender, or mortgage broker (if one is involved 
in the transaction) may order the property inspection. The lender or 
mortgage broker may charge the borrower for this inspection.

D. Repairs

    If the inspection report notes that repairs are required because of 
structural or ``health and safety'' issues, those repairs must be 
completed prior to closing. After completion of repairs to address 
structural or ``health and safety'' issues, the inspector must conduct 
a final inspection to determine if the repairs have been completed 
satisfactorily and eliminated the structural or ``health and safety'' 
issues. The borrower, lender, or mortgage broker may order the final 
inspection.

V. 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.

VI. Period of Waiver Eligibility

    The waiver that is the subject of this notice remains effective 
beyond February 1, 2011, through December 31, 2011, for all sales 
contracts executed on or after February 1, 2010, the availability date 
provided by the issuance of the waiver in January 2010, 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.

VII. Solicitation of Public Comments

    HUD again welcomes comments on the conditions specified in this 
notice for eligibility for waiver of its regulation on property 
flipping.

    Dated: January 28, 2011.
David H. Stevens,
Assistant Secretary for Housing--Federal Housing Commissioner.

Appendix

Assessment of Exemption From Compliance With FHA's Regulation on 
Property Flipping in Calendar Year 2010

    On February 1, 2010, FHA issued a one year waiver of regulation 
24 CFR 203.37a(b)(2) that prohibits the use of FHA financing to 
purchase properties that are being resold within 90 days of the 
prior acquisition by the seller. At the time the waiver was issued, 
the housing market was still experiencing high rates of foreclosure 
which had started over the previous two year period and were 
expected to continue until market conditions improved. The housing 
market continues to experience high rates of foreclosures, and as of 
October, 2010, the housing supply for existing homes is at 10.5 
months. In addition, FHA expects its foreclosure inventory to 
increase by 50 percent in 2011. Home prices declined for a third 
month (including distressed sales) by 3.93 percent in October 2010, 
compared to a year ago. The distressed sale share remains at 28 
percent. The shadow inventory (90+ delinquencies, foreclosures and 
REOs not listed for sale) is estimated between 2 to 4 million units. 
As a result, the housing inventory is expected to remain elevated 
for some time. Investors and homeowners are finding value in 
purchasing REOs in the current market. Investors are more likely (52

[[Page 6153]]

percent) to purchase damaged properties versus first-time or current 
homeowners (Inside Mortgage Finance, June 2010). Since the waiver 
went into effect, overall HUD real-estate owned (REO) purchases and 
investor purchases have increased by 20 and 25 percent, 
respectively.
    The waiver implemented various controls to help mitigate the 
risks associated with 90 day property flips. The transaction has to 
be arms-length with no pattern of previous flipping. If the sale of 
the property is 20 percent above the seller's acquisition cost, the 
increase in value must be justified with:
     A 2nd appraisal and/or supporting documentation 
justifying the increase in value
    -AND-
     Property inspection report to be ordered by the Lender.
    In addition, if the sale of the property is 20 percent above the 
seller's acquisition cost, the loan was targeted for a Post 
Endorsement Technical Review (PETR). To ensure FHA's risk controls 
are adequate, FHA analyzed and compared 90-day property flipping 
loan data and other purchase loan data in three key areas: (1) EPDs; 
(2) Credit Profile; and (3) Property Defects.
    1. Early Payment Defaults (EPDs) are defined as a 90-day 
delinquency within the first 6 payment cycles. There are currently 5 
EPD loans for 90-day property flip loans. Below is a comparison of 
FHA 90-day flip loans to other purchase mortgages (less HECM) 
endorsed between 2/1/10 and 10/31/10. It should be noted that it is 
too early to draw any meaningful conclusions concerning EPDs since 
the waiver was implemented in 2/1/10.

------------------------------------------------------------------------
                                                   Flips      Purchases
------------------------------------------------------------------------
Loans.........................................       17,114    1,200,650
EPDs..........................................            5        1,742
Percentage....................................        0.03%        0.15%
------------------------------------------------------------------------

    2. FHA insured 16,999 loans under this waiver from 2/1/10 
through 9/31/10. FHA compared the credit profile of 90-day property 
flip loans with other loan purchases (less HECM) to determine if the 
credit profiles were similar. FHA 90-day property flip loans and 
other purchase loans are almost identical from a credit perspective.

----------------------------------------------------------------------------------------------------------------
                                                                Average front     Average back    Average total
                          Loan type                               end ratio        end ratio          score
----------------------------------------------------------------------------------------------------------------
90-day Property Flip.........................................            27.92            40.86              694
Other Purchases..............................................            26.96            40.58              698
----------------------------------------------------------------------------------------------------------------

    3. Of the 16,999 loans, FHA reviewed 833 (4.9 percent) 90-day 
property flip loans through its Post Endorsement Technical Review 
(PETR) process from 2/1/10 through 9/31/10. FHA compared the 
percentage of loans rated Unacceptable for Valuation Review to PETR 
Reviews and to the 90-day property flip loan population. Currently, 
90-day property flip loans have substantially more Unacceptable 
Valuation ratings compared to other purchase loans (less HECM). The 
percentage of unacceptable valuation reviews to PETR reviews for 90-
day property flipping loans is 47.54 percent. However, the majority 
of these Unacceptable Valuation reviews are the result of 
documentation compliance issues (i.e. missing inspection report, 2nd 
Appraisal, Termite Report). It should be noted that these are new 
requirements for the mortgagee and FHA. The mortgagees were 
interpreting the controls inconsistently/incorrectly. In addition, 
these loans were originated this year and the process of resolving 
documentation issues can often take several months. Actual property 
defects (issues with the actual property such as holes in the walls, 
faulty wiring, etc.) are limited to 10.08 percent which is 
comparable to FHA's other purchase loans.

------------------------------------------------------------------------
                                                          Percentage of
                                     Percentage of        unacceptable
           Loan type            unacceptable valuation      valuation
                                   reviews  to PETR      reviews to loan
                                        reviews            population
------------------------------------------------------------------------
90-day Property Flip..........  10.08% (Property                    .49%
                                 Defects).
Other Purchases...............  9.79%.................              .39%
------------------------------------------------------------------------

[FR Doc. 2011-2434 Filed 2-2-11; 8:45 am]
BILLING CODE 4210-67-P