FHA-Financed Flipping OK In Disaster Areas

by Peter G. Miller
December 3rd, 2008

For a number of years HUD has attempted to prevent illegal flipping by limiting the ability of buyers to purchase properties with FHA loans which were recently re-sold.

In basic terms, HUD began its “Prohibition of Property Flipping in HUD’s Single-Family Mortgage Insurance Program” in 2003. A key element of the program is that HUD will generally not insure FHA mortgages for any property which has been re-sold during the past 90 days.

If you think through the logic of this you can see that HUD has a very good idea — illegal flippers want to sell and re-sell properties as quickly as possible.

Unfortunately, not all flippers act illegally. The HUD rule is very broad and inevitably and unfairly snares legitimate investors.

The 2003 regulation was very rigid — no exceptions. However, in 2006 the rule was changed to so that individuals could quickly buy and re-sell homes in presidentially-declared disaster areas. Why? Because in those areas there is a tremendous need to re-start the local real estate market.

Imagine that Smith buys a house and two days later the town is leveled by a tornado. Smith re-thinks his residency plans and decides to sell. If the community is in a presidentially-declared disaster area Smith can sell to a buyer who wants to use FHA financing.

In effect, HUD made the rule more flexible — and better — with its 2006 changes.

You can see the HUD policy at work with its latest letter to lenders:

“This Mortgagee Letter announces that HUD is exempting the counties identified on Attachment 1, which are subject to Presidential disaster declarations, from the time restrictions on insurable re-sales found at 24 C.F.R. 203.37a(b). The exemption is in effect for all contracts of sale entered into from the date of the Presidential declaration applicable to the area in which the property is located, to September 30, 2009.”

The areas involves this time around include:

Nebraska: the eligible counties are – Buffalo, Butler, Colfax, Custer, Dawson, Douglas, Gage, Hamilton, Holt, Jefferson, Kearney, Lancaster, Platte, Richardson, Sarpy, and Saunders Counties.

Indiana: the eligible counties are – Adams, Bartholomew, Brown, Clay, Daviess, Dearborn, Decatur, Gibson, Grant, Greene, Hamilton, Hancock, Hendricks, Henry, Huntington, Jackson, Jennings, Jefferson, Johnson, Knox, Lawrence, Marion, Monroe, Morgan, Owen, Parke, Pike, Posey, Putnam, Randolph, Ripley, Rush, Shelby, Sullivan, Tippecanoe, Vermillion, Washington, Wayne, and Vigo Counties.

Wisconsin: the eligible counties are – Adams, Calumet, Crawford, Columbia, Dane, Dodge, Fond du Lac, Grant, Green Lake, Iowa, Jefferson, Juneau, Kenosha, La Crosse, Marquette, Manitowoc, Milwaukee, Monroe, Ozaukee, Racine, Rock, Richland, Sauk, Sheboygan, Vernon, Walworth, Washington, Waukesha and Winnebago Counties.

Illinois: the eligible counties are – Adams, Clark, Coles, Crawford, Cumberland, Douglas, Edgar, Hancock, Henderson, Jasper, Lake, Lawrence, Mercer, and Winnebago Counties.

Missouri: the eligible counties are – Adair, Andrew, Callaway, Cass, Chariton, Clark, Gentry, Greene, Harrison, Holt, Johnson, Lewis, Lincoln, Linn, Livingston, Macon, Marion, Monroe, Nodaway, Pike, Putnam, Ralls, St. Charles, Stone, Taney, Vernon, and Webster Counties.

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