[Federal Register Volume 77, Number 230 (Thursday, November 29, 2012)]
[Rules and Regulations]
[Pages 71099-71101]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28918]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 203

[Docket No. FR-5397-N-05]
RIN 2502-ZA05


Federal Housing Administration (FHA): Temporary Waiver of FHA's 
Regulation on Property Flipping; Extension of Waiver

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

ACTION: Notice of waiver extension.

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SUMMARY: This notice of waiver extension 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, 2014. This waiver, which was first 
issued in January 2010, took effect for all sales contracts executed on 
or after February 1, 2010. On January 28, 2011, FHA extended the waiver 
through calendar 2011. On December 28, 2011, FHA extended the waiver 
through calendar 2012. Prior to the waiver, a mortgage was not eligible 
for FHA insurance if the contract of sale for the purchase of the 
property that secured the mortgage was executed within 90 days of the 
prior acquisition by the seller, and the seller did not come under any 
of the exemptions to this 90-day period specified in the regulation.
    Through the regulatory waiver, FHA 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, 
helping to stabilize real estate prices as well as neighborhoods and 
communities where foreclosure activity has been high. The waiver is 
applicable to all single family properties being resold within the 90-
day period after prior acquisition, and is not limited to foreclosed 
properties. Additionally, the waiver is subject to certain conditions, 
and mortgages must meet these conditions to be eligible for the waiver. 
The waiver is not applicable to mortgages insured under HUD's Home 
Equity Conversion Mortgage (HECM) Program.

DATES: Effective Date: January 1, 2013 through December 31, 2014.

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 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 recent resales

[[Page 71100]]

of single family properties; 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. The acquisition date is the date that seller has the 
power, under the law of the state in which the property is located, to 
transfer title to a buyer. Section 203.37a(c) lists the sales 
transactions that are exempt from this rule. The exempt transactions 
include sales by HUD of real estate-owned (REO) properties under HUD's 
regulations in 24 CFR part 291, sales by other federal agencies 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 (GSEs).
    ``Property flipping'' refers to the practice in which a property 
recently acquired is resold for a considerable profit with an 
artificially inflated value, often as the result of a lender's 
collusion with an appraiser. Most property flipping occurs within a 
matter of days after acquisition, and usually with only minor cosmetic 
improvements, if any, to the property. 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 secures 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 
specified in Sec.  203.37a(c).
    In a final rule published on June 7, 2006 (71 FR 33138), HUD 
expanded the exemptions to the 90-day time restrictions contained in 
Sec.  203.37a(c) to include transactions such as sales of single family 
properties by GSEs, state- and federally-chartered financial 
institutions, nonprofit organizations approved to purchase HUD 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 several years led 
to a rapid rise of homeowners defaulting on mortgages, and consequently 
an increase in vacant foreclosed homes. Federal, state, and local 
governments initiated a variety of measures to avoid foreclosures. 
Although these efforts to keep families in their homes have helped to 
improve the condition of the housing market, the foreclosure rate 
remains unacceptably high. 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 the waiver of its regulation on property flipping, HUD 
seeks to help stabilize neighborhoods and communities.
    HUD first granted temporary waiver of its regulation on anti-
property flipping through notice published in the Federal Register on 
May 21, 2010, at 75 FR 28633. The May 2010 notice waived HUD's 
regulations through December 31, 2011. Through notice of waiver 
extension published in the Federal Register on December 28, 2011, at 76 
FR 81363, HUD extended the waiver through December 31, 2012. Through 
this notice of waiver extension published in today's edition of the 
Federal Register, HUD announces the extension of the waiver through 
December 31, 2014. HUD is cognizant of concerns expressed by industry, 
state and local jurisdictions, and other interested parties that they 
receive sufficient advance notice by HUD of any planned extension of 
the waiver, which they advise was not the case in the extension of 
waiver through the end of calendar year 2012. For this reason, HUD is 
providing notice of the extension of the waiver through December 31, 
2014, well in advance of December 31, 2012.
    Since the waiver was made available, HUD believes that it has made 
a significant contribution to neighborhood stabilization. While the 
waiver remains available for the purpose of stimulating rehabilitation 
of foreclosed and abandoned homes for two more calendar years, 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. 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 ensure that the mortgage meets 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 may 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 price of the property is greater 
than 20 percent above the seller's acquisition cost, the mortgage is 
eligible for the waiver only if the mortgagee:
    a. Justifies the increase in value by retaining in the loan file a 
second appraisal and/or supporting documentation, 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

[[Page 71101]]

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. 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 mortgage will be eligible for 
FHA insurance 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 mortgage will be eligible for 
FHA insurance 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.

IV. 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 December 31, 2012, through December 31, 2014, 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.

    Dated: November 26, 2012.
Carol J. Galante,
Acting Assistant Secretary for Housing-- Federal Housing Commissioner.
[FR Doc. 2012-28918 Filed 11-28-12; 8:45 am]
BILLING CODE 4210-67-P