Situation
To eliminate the most egregious examples of predatory “property flipping”, the Federal Housing Administration (FHA) implemented a regulatory change in 2003 to protect home purchasers using FHA financing. Property flipping involves the resale of a recently acquired property for considerable profit with an artificailly inflated value, often abetted by a seller’s collusion with the appraiser and leaving the borrower as a unknowing victim. The regulatory change implented by FHA was intended to protect these borrowers by, among other provisions, limiting eligibility for FHA financing if a property is sold within a short period of time after its original sale, and by requiring specific amounts of time to pass between an original purchase and a resale of a property. These requirements were intended to prevent the typical short periods of time that pass between the purchase of a property and the time that it is flipped.
Eighteen months after implementation of the regulation, FHA engaged Concentrance to conduct a qualitative evaluation of the FHA Property Flipping Rule’s impact on the industry, including its impact on its business partners and the mortgage industry.
Approach
Our approach identified a number of key questions.
- Was the current property flipping rule yielding unintended consequences for HUD/FHA, its business partners and borrowers? Specifically, did its requirements unnecessarily burden borrowers and lenders?
- Is the property flipping rule adequately protecting the FHA mortgage insurance funds?
- Are there policy enhancements that would improve the effectiveness of the current property flipping rule?
- Does the current policy create an unnecessary burden on sellers, borrowers and lenders?
To answer these questions, we gathered quantitative and qualitative data from participants in property sales, valuation and mortgage finance in Metropolitan Statistical Areas (MSAs) with a historically high incidence of predatory property flipping. These areas include Baltimore, Atlanta, Kansas City in Kansas and Missouri, and Indianapolis. We also focused on MSAs with a historically low to moderate rate of predatory property flipping, which included Dallas, Phoenix and Chicago. The goal was to gather information on the demographics of participants, determine unintended consequences or burdens of the property flipping rule and the extent of protection of the FHA mortgage insurance funds, and recommend policy enhancements.
Outcome
Our analysis and report prompted FHA to substantially revise the Property Flipping Rule. The revsions and recommendations aimed to enhance protection of FHA borrowers, lenders, and the FHA Insurance Fund.