Mortgage Lending and Property Flipping

In the go-go days of rapid price appreciation, there
was a big wave buyers who made property purchases,
maybe did some cosmetic improvements, and then offered
the home for sale at a vastly increased price.

This practice became known as "flipping", and there
were even TV programs devoted to the trials and
tribulations of people involved in the practice!

In today's environment, flipping properties by
buying them at close to market values and counting
on the appetite of new buyers to pay higher prices
for the home as waned.

However, those buyers who are always looking for a
fast profit have found another way to put themselves
in that position.

With the rash of homeowners who are in financial
trouble, short sales, foreclosures, and bank-
owned properties, there are a lot of sellers who are
extremely motivated to unload their burden and their
homes at give-away prices.

Buyers are forming syndicates and paying cash for
properties, many times buying in bulk from lenders
who have a portfolio of homes that they want to get
off of their books.

What does this have to do with new mortgage lending?

We are seeing that the federal regulators want to
put some restrictions on flipping properties by putting
more requirements on new loans.

Specifically, FHA currently prohibits insuring a
mortgage on a home owned by the seller for less than
90 days. They are presenting this limitation as a way
to protect the borrower from overpaying for a new home.

But, FHA already has appraisal requirements in place,
that when performed properly, can serve to give the buyer
a fair opinion of the value of the property. It would
make sense to disclose to the buyer the date the property
was purchased by the seller and ascertain their purchase
price. This information, coupled with the appraised
value should give a buyer enough information for them to
make an informed decision as to whether to proceed with
the transaction.

It seems inappropriate to tell a buyer that they cannot
buy a home using FHA financing if the seller has owned
the property for such a short time. There are plenty of
instances where a buyer wants to negotiate a good value
for themselves and chooses not to concern themselves with
the profit a seller is making.

We are also seeing situations on VA (and some FHA)
transactions where the lender will require a second
appraisal to verify value in an effort to control
flipping. In this case, I suppose the theory is that
if the first appraiser was part of an organized group
to participate in fraud, the second appraisal would be
a way to cross-check all the facts. These come into
play when the property has been recently acquired by
the seller.

Mortgage lending in the past was fairly singular in
purpose: lenders used good judgment to provide
financing to qualified buyers to encourage home
ownership.

Now we are seeing that mortgage lending is another
device that the regulatory agencies manipulate to
meet other goals.

This contributes to the frustration that originators
and borrowers are feeling right now. Guideline
changes used to have a linear quality that made some
sense as lenders loosened and tightened their criteria.

Now, guideline changes come into play from many directions,
and they are confusing, hard to interpret, and many
times contradictory. Lenders and originators are
struggling to develop procedures and policies that
adhere to the new regulations and keep us all in
compliance.

In the old days, we used to talk about the modified
"golden rule" of lenders: Those that have the gold
make the rules.

This still holds true, but instead of the lenders
having the gold and making the rules, it is now the
federal government who have taken over that role.