The FHA has addressed a lot of "malpractice" in the practice of flipping properties.  Reportedly, some investors are profitting well at the expense of the FHA.

But the FHA found that too many property flips using its insured
mortgage program involved outright fraud — hyped appraisals, shell
games where property flippers never actually took legal title to the
house before selling it for huge profits, sometimes overnight.

Link: Realty Times – Real Estate News and Advice.

To rein in such practices, FHA proposed — and last week adopted in final form — new restrictions. Specifically, FHA will now require that:

    * Only owners of record — listed as such in the local court house real estate recordations — may sell properties that will be financed using FHA insured loans.

    * Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing.

    * For resales that occur between 91 and 180 days where the new sales price exceeds the previous sale price by 100 percent or more, FHA will require additional documentation of the property’s true value before insuring the mortgage.

    * The agency may also require additional evidence of the accuracy of appraisals whenever properties are re-sold at high price gains within 12 months.

The FHA 90-day no-flip time restrictions will be waived when the sellers of properties to be financed are:

    * HUD itself, disposing of its REO (real estate owned) acquired property portfolio.

    * Sales of properties that were acquired by the sellers through an inheritance.

    * Fannie Mae, Freddie Mac or other federally-chartered financial institutions disposing of REO.

    * Local or state housing agencies.

    * Nonprofit organizations that have previous approvals to purchase HUD REO properties at a discount.

    * Properties located in a presidentially-declared disaster area, provided FHA has issued a formal announcement of eligibility for a specific disaster area.

Real estate investors, particularly those who specialize in rehabilitations of rundown structures in central city areas, had complained to HUD about possible negative impacts on their business activities stemming from the new rules. But HUD decided that banning most 90-day or under flips, and by scrutinizing flips between 91 and 180 days of acquisition where the price markup exceeded 100 percent, FHA should be able to protect itself against the worst abuses.

Investors with questions about the new regulations can call 1-800-CALL FHA for guidance. The rules are contained in HUD Mortgagee Letter 2006-14, issued June 8.

I, for one, am glad to see that the hucksters are being shaken out of the industry.  We need to uphold the ethical standards that so many of us take for granted.

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