Flippers: Prepare for the FHA Smackdown

Picture description: Guy with long hair:  FHA (Federal Housing Administration)….Guy getting laid out: builders and investors who have been selling lots of properties to FHA financed buyers.

The Wall Street Journal put out an interesting article tonight. So interesting and yet so subtle that I had to blog about this.

The article titled, “Behind FHA Strains, a Push to Lift Housing” highlights the following main points:

• FHA backed mortgages now account for almost a quarter of all mortgages issued, up from 3% three years ago
• There is high concern that a large amount of FHA borrowers are upside down on the equity of their homes
• FHA’s default rate is soaring, causing many to worry that it will become another burden on taxpayers
• FHA’s aggressive approach to increase market share has had a strong impact on solidifying the housing market
• To handle the political “heat” that may be coming down, FHA is going to probably get a lot of pressure to tighten up its lending requirements more than it currently has in place and finally….
• Mounting losses by FHA will lead to “imminent pullback”

Ok, what does all this mean for the average flipper out there who has been taking advantage of some of the best flipping opportunities in years?

My humble opinion….

The FHA is simply a political “Yes man” to whatever is politically pertinent at the time. US taxpayers are extremely frustrated with the tax burdens our government is accumulating. The idea of a FHA Bailout will cause a political lightning rod of angry citizens.

The knee-jerk reaction to this is to tighten up the levers quickly, despite what underwriting standards FHA may announce. We have already seen this with Fannie. Fannie claims to underwrite up to 10 loans for an investor but yet the mortgage originator will not touch these underwriting opportunities because different standards are implied.

This will mean immediate scrutiny and increased pressure particularly for investors and builders. FHA already has implemented several strategies to deter investors from flipping properties to homeowners using FHA financing. The process of flipping a home to FHA financed buyers is grueling. I know because I just finished selling 6 this month. 

If you thought waiting 90 days, providing detailed list of repairs of getting 2nd appraisals was tough….be prepared for worse than this.

How about something stupid like this: no flips for 180 days…(period)! 

With losses mounting, FHA has announced it is hiring a new “credit risk” guru who is going to figure out how to limit risk. Listen flippers, don’t get pissed if all your flips suddenly die off because FHA kills your deal somehow. They got 25% of the market!! They can do whatever you want!

Here is where I am going….If you have plans to flip houses or if you have flipped many houses to FHA borrowers, its gonna end! Instead of getting caught in the crap, readjust now. Figure out how to flip homes to conventionally financed borrowers!

FHA is going to blow up any deals you have. Investors have always been an easy target. They will be again. The FHA understands that it has had a powerful impact in solidifying the housing market and it isn’t going to just come out and say, all borrowers must now put down 10%. They understand that the majority of their borrowers are half subprime….its always been that way. So, if you can’t put the screws to directly to the borrowers, where else can you tighten credit? To give the public “feel good” answers, the credit czar is going to come out and say stupid crap like “after diligent analysis, we have determined that greedy investors and builders flipping quickly renovated or built properties is the cause of high amounts of delinquency, therefore, we are going to put the smackdown on them!”

Hey, somebody needs to get some blame, mine as well be the greedy capitalists.

Flippers, quit whining about it or ignoring it….adjust to it and take control! Go find your own lender and price your deal well enough that conventional financed buyers will make an offer. 

I’m not going to wait for FHA to pull the rug out from underneath me. Lets see what happens in 6 months.

Bob Norton

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