On Friday, January 15, 2010 HUD announced a temporary suspension of
HUD’s policy of prohibiting FHA insured financing for properties owned
by sellers for less than 90 days ( flips ). This change in policy has
been implemented to aid in stabilization of home values and improve
conditions in areas with high foreclosure activity.

This change has been noted as temporary, beginning February 1, 2010 and
is effective for one year, unless extended or withdrawn by HUD
commissioner. Furthermore, it will have very strict conditions and
guidelines for property eligibility to ensure that predatory practices
are not allowed. The waiver is limited to those sales meeting the
following general conditions:

1. Must be “arms length” transactions with no identity of interest
between buyer, seller or other parties participating in the sales
transaction. Lenders should carefully consider the transasction to
ensure that there is no collusion between any of the parties, i.e.,
seller holds title to property – no contract assignments, no pattern of
previous flipping activity with most recent 12 month period, the
property was marketed open and fairly. These are a few of the
conditions and characteristics that lenders are charged with verifying.

2. In cases where the property is being sold for more than 20% of the
sellers acquistion cost, the waiver will only apply if the lender can
document and justify with supporting documentation that the seller as
completed sufficient legitimate renovations on the subject property to
substantiate the increase in value and/or a second appraisal. ( My
guess is that in most cases for properties resold within 90 days, a
second appraisal will be standard )

3. Lenders will be required to order and obtain a property inspection
and provides the inspection report to the purchaser before closing. The
use of FHA approved inspectors in not required. Buyers will be allowed
to pay for the inspection. The inspection must include the property
structure, foundation, floor, ceiling walls and roof; the exterior,
including siding, doors, windows, appurtenant structures such as decks,
balconies, walkways and driveways; the roofing, plumbing, electrical,
heating and ac systems; all interiors; and, insulation and ventilation
systems, as well as fireplaces and solid fuel burning appliances.

This is good news for investors and for the housing market as a whole.
Since this policy change is so new and unexpected, lenders will need
sufficient time for internal policies to be put into place by the
effective date of Feb. 1