The financial crisis of 2008 and the subsequent meltdown of the housing market has left a huge wake of residual rules and regulations that affect home buyers and sellers nationwide. It is no secret that back then, the governments blatant policies encouraging anyone that could fog a mirror (rather than could afford a mortgage) were encouraged to become home buyers.
Lenders were often cajoled to lend money to the bottom 2/3 of the market with special sub prime mortgages, adjustable rate mortgages and interest only mortgages offered by government backed programs like FHA. It is no wonder that they were the heaviest hit when the real estate bubble burst in 2008 and 2009.
Anti Flipping Rules for FHA
A littenay of of new laws and regulations were put in place to make sure that borrowers were never again going to be subjected to predatory lending practices that we saw running rampant a decade ago. Showcase pieces of legislation like Dodd Frank were rolled out with pomp and circumstance by the very legislators that created the crisis by demanding that everyone become a homeowner whether they could afford it or not.
While some of the rules and regulations that were created by Dodd Frank have been rolled back in 2019 there are still several others that appear to be obscure and yet have a negative impact on further recovery. It has been 11 years since the crisis and we are still subjected to two Anti Flipping Rules for FHA Loans that make the restoration of many neighborhoods more expensive for everyone.
The 90 Day Flip Rule
Anti-Flipping Rule number One: If you purchase a distressed house or other real estate for the purpose of rehabbing and placing back on the market for sale within 90 days of the original purchase it is not allowed under government backed loan protocols. I have never understood this rule especially in 2009 when cleanup and recovery were essential to an entire neighborhoods health. Distressed and vacant houses were everywhere and lenders had a moratorium on approving loans especially for houses that needed any repairs.
The idea at the time was that the government was going to force lenders to protect consumers from getting into houses that needed any work at all. That piece of the equation made sense as most homeowners have proved that they could not maintain a distressed house that had substantial damage or ongoing maintenance issues costing thousands of dollars thereby jeopardizing their ability to pay the mortgage let alone the repairs. But the rules were written in the extreme and created a wider net that was cast to limit lending and the recovery of the housing market.
What Dodd Frank also did was limit the number of loans that a Sacramento real estate investor could have at any given time regardless of their credit or income. The rationale for that was that the banks were not going to take out what the government considered high risk loans even to people that had proven their capability.
The effect of the rules is that it shut down real estate recovery for years. The only buyers that could afford to purchase houses at the time were Sacramento cash home buyers that didn’t require a loan. I know, I was one of the pioneer Sacramento real estate investors that bought several distressed properties with my own money and proceeded to rehab it to get it ready for sale.
Imagine purchasing a house that had been gutted by transients, looters, drug addicts and vandals of all its copper pipes and wire (plumbing and electrical), all of its fixtures and and appliances and was left to rot as a shell. As an investor you spend 10’s of thousands of dollars to rehab the house and if you could fix it and get it on the market withing 45 days your house could not qualify for a government backed FHA loan because you were too efficient with your labor and repairs. The rule still stands today and cost’s all cash home buyers hundreds of thousands of dollars annually and continues to slow the housing recovery.
Is there something about holding on to a house for 90 days that makes it more valuable or a less risky proposition? Or does it just add another layer of cost when it is finally sold to the buyer for holding cost. Purgatory for houses that serve a 90 sentence for an unknown regulatory purpose and protected no one. Under the rules… houses could be sold after 90 days without restriction and they still needed to be appraised by an independent appraiser not of the lenders choosing.
This rule still stands today.
The 180 Day Flip Rule: 2 Appraisals
Equally as destructive as the 90 day rule is another obscure anti flipping rule that further restricts the sale of a house within 180 days of its original purchase if it was purchased for more than half of what the new sales price is today.
Here is a real life example of that rule for one property that I have purchased. 2058 Phelps St, Stockton CA. 95206. The house was owned by a gentleman that had purchased several rental properties that were part of an investment portfolio he had worked tirelessly to put together. Upon his passing in the mid 1980’s his daughters just continued to keep the house rented and collect the rent. They never took the estate through probate thereby avoiding those cost and basically operated under the radar for nearly 25 years.
The sisters got older and the houses suffered years of deferred maintenance and when it became apparent that the houses were no longer going to be productive the sisters hired an attorney and began the probate process. The house was an absolute mess. It had code violations from the City of Stockton and there were many different squatters that vandalized the house stealing copper plumbing and electrical wiring from the walls. When I purchased the house for $75,000 it had been on the market for 5 months without any offers whatsoever.
The house is located on the south side of Stockton in an older neighborhood that has suffered through a lot of financial crisis that lingers from the great recession. As a Stockton cash home buyer, we buy Stockton houses with our own money, rehab them and then place them back on the market as quickly as possible. When houses are listed, the owners either accept FHA, VA and other government backed loan programs or not. Some investors only sell their homes to buyers with conventional loans, but I understand that that locks a lot of buyers that dont have large down payments out of the houses that I sell.
Mind you that 98% of all houses that I sell either with and FHA or a conventional loan has at least one and as many as three home inspections. Today’s buyers and lenders are very thorough and are very restrictive forcing sellers to fix almost everything found in the inspection reports.
As an additional precaution, every house needs to be appraised and come in at value by an independent and trained FHA or VA appraiser. This house had 3 inspections and repairs were made to comply with buyer requests. Now keep in mind that not all inspection findings are real or even have an impact on the viability of a house. Inspections are subjective at best as are appraisals.
Nonetheless, the appraisal was scheduled and was completed with in two weeks of the opening of escrow. The house appraised for $242,000 and was scheduled for closing in 5 days. Right on schedule. The house was 10 days past the 90 day rule but because the sales price of $242,000 was more than double the original sales price of $75,000, the lender said that they needed a second appraisal according to FHA guidelines.
I understand that a rule is a rule, but I also know that these Anti Flipping Rules for FHA and VA Loans are arcanine that actually restricts the ability of the real estate market from completely healing. These rules are 45 day speed bumps that hinder employment of more construction workers and limit the numbers of houses annually that real estate investors could be buying and rehabbing in certain areas that are going to require government backed loans for new buyers.
The Paradox of the Government and It’s Programs
Remember that these Anti Flipping Rules for FHA and VA Loans are designed to protect consumers from the predatory lending practices of banks and mortgage brokers. It is very ironic, however, that the FHA loan the buyers are securing, that is government backed, is actually 3 seperate government loans designed first time buyers. More Ironic is that the buyers have not been required to actually come up with any down payment money themselves. In their offer they asked for a $4,000.00 seller credit that will be paid to Fannie Mae on the day we finally close.
In the meantime, regulations that were implemented to prevent this type of subprime lending practices has been sidestepped to the extent that low income buyers are offered mortgages that up and until now were not allowed since 2008.
Chase Mortgage CEO to CNBC: FHA loans same as “subprime lending”
Kevin Watters, CEO of Chase Mortgage Banking, said in an interview with CNBC on Monday that the Federal Housing Administration’s loan requirements look an awful lot like subprime lending.
“FHA requirements are down to a 520 FICO (credit score) and you only have to put 3.5% down; that’s subprime lending, and we’re not in the subprime lending business,” CNBC quotes Watters saying.
As a side note, the second FHA Appraisal was ordered 5 days ago (according the Anti Flipping Rules for FHA Loans) and we have yet to hear from anyone regarding an appointment. I love government programs that are designed to prevent abuse but just delay everything for several weeks. If there is a delay for another 10 days the 180 day rule will actually expire and there will be no need for the second appraisal at all. Now that is a Paradox.
Finally, all of these rules that were designed to keep lenders out of homes that they couldn’t afford to prevent another foreclosure crisis, are being sidestepped by the government.
My name is Peter Westbrook and I am a real estate investor in Sacramento, Stockton and Modesto CA. We buy houses in Sacramento that most other people dont want and we pay cash. I would estimate that the rules regarding anti-flipping prevent my company from bringing 5 to 10 additional houses to the market each year. Multiply that by the number of real estate investors that rehab houses in California and we have a housing crisis almost diverted.