May 1, 2003
BUSH ADMINISTRATION PROVIDES HOMEBUYERS NEW PROTECTION FROM PREDATORY LENDING PRACTICE
New "Anti-Flipping" Rule Holds Lenders, Sellers and Appraisers Accountable
WASHINGTON - Housing and Urban Development Secretary Mel Martinez today announced a new initiative in the Bush Administration's efforts to crack down on predatory lending. HUD published a final rule today in the Federal Register addressing property "flipping" on mortgages insured by the Federal Housing Administration (FHA).
Property "flipping" occurs when a recently acquired property is resold for a considerable profit with an artificially inflated value.
"The Bush Administration is committed to maintaining a strong housing market in which consumers can feel confident that they are protected from unscrupulous practices," Martinez said. "This final rule represents a major step in our efforts to eliminate predatory lending practices."
Predatory lending results when home purchasers become unwitting victims of lenders, sellers and appraisers, often working together. The unsuspecting homebuyers either purchase homes with sales prices far in excess of the fair market value, or are substantially overcharged with costs associated with obtaining a mortgage.
The final rule, "FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs," makes recently flipped properties ineligible for FHA mortgage insurance. It also allows FHA to better manage its insurance risk by requiring additional support for a property's value when a significant increase between sales occurs. Features include:
Sale by Owner of Record: Only the owner of record may sell a home to an individual who will obtain FHA mortgage insurance for the loan; it may not involve any sale or assignment of the sales contract, a procedure often observed when the homebuyer is determined to have been a victim of predatory practices.
Time Restrictions on Re-sales:
- Re-sales occurring 90 days or less following acquisition will not be eligible
for a mortgage to be insured by FHA. FHA's analysis disclosed that among the
most egregious examples of predatory lending was on "flips" that occurred
within a very brief time span, often within days. Thus, the "quick flips"
will be eliminated.
- Re-sales occurring between 91 and 180 days will be eligible provided that
the lender obtains an additional appraisal from an independent appraiser based
on a re-sale percentage threshold established by FHA; this threshold would
be relatively high so as to not adversely affect legitimate rehabilitation
efforts but still deter unscrupulous sellers, lenders, and appraisers from
attempting to flip properties and defraud homebuyers. Lenders may also prove
that the increased value is the result of rehabilitation of the property.
- Re-sales occurring between 90 days and one year will be subject to a requirement that the lender obtain additional documentation to support the value to address circumstances or locations where HUD identifies property flipping as a problem. This authority would supersede the higher expected threshold established for the above-mentioned 90 to 180 day period and will be invoked when FHA determines that substantial abuse may be occurring in a particular locality.
Other recent actions by the Bush Administration to protect homeowners from predatory lending and promote homeownership include:
- A proposed rule making lenders accountable for appraisals on mortgage insured
- A recent plan announced by HUD to expand protection of homeowners by proposing
performance standards for appraisers of FHA-single family homes under its
Appraiser Watch Initiative. Under Appraiser Watch, some 25,000 appraisers
will be held accountable for faulty appraisals, which too often lead to default
and foreclosure. FHA will monitor appraisers' default and claim rates and
will levy sanctions - including removal from its list of approved appraisers -
against those whose rates are excessive.
- A proposal to reform the regulatory requirements of the Real Estate Settlement
Procedures Act (RESPA) that would make the process of buying and refinancing
a home significantly simpler, potentially less expensive and would protect
consumers from unscrupulous lending practices.
- The "Homebuyer Bill of Rights," which requires greater disclosure of costs associated with buying a home, allows consumers more choices in choosing providers of closing services, limits excessive settlement fees and encourages innovation and competition in the marketplace.
HUD is the nation's housing agency committed to increasing homeownership, particularly among minorities, creating affordable housing opportunities for low-income Americans, supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development as well as enforces the nation's fair housing laws. More information about HUD and its programs is available on the Internet.