The Department of Housing and Urban Development (HUD) recently published an updated interim rule on real estate transactions known as "flipping." The existing rule that prohibits flipping was issued in May 2003, but questions and concerns about its stringency have prompted HUD to propose an update.

Flipping is defined by HUD as a "predatory lending practice whereby a property that was acquired is quickly resold for a considerable profit with an artificially inflated value, often abetted by a mortgagee’s collusion with the property appraiser and others involved in the mortgage loan transaction." The final rule from 2003 makes properties that have been resold in less than 90 days ineligible for FHA-financed mortgages. Properties flipped between 91 and 180 days may qualify for FHA financing but are subject to documentation requirements to validate the increase in property value. The existing rule exempts properties acquired and sold by HUD through its REO activities; properties within single-family HUD-identified revitalization zones; and properties acquired by employers or relocation agencies in connection with employee relocations.

The interim rule, which is open for public comment until February 22, 2005, also exempts from the rule any property acquired by any Federal agency in the ordinary course of its business. Agencies specified by name as qualifying agencies (but not meant to limit the qualifying agencies) are the Rural Housing Service (part of the Department of Agriculture), Veterans Affairs, and the Federal Deposit Insurance Corporation. Statewide Title has received inquiries into whether properties acquired through foreclosure proceedings by entities such as Fannie Mae would qualify for this exemption, and our reading of the rule leads us to believe that Fannie Mae would be a qualifying federal agency.

The interim rule also exempts properties acquired through inheritance, making it clear that persons who acquire property in this manner and then sell it are not "flipping" it, no matter how quickly they sell.

Finally, the interim rule discusses questions raised about bank foreclosures, as well as incentive programs in which builders buy an existing home from an individual who buys a new home from the builder. HUD considers these situations to be transactions in which there is a higher risk of artificially inflated appraisals and predatory lending, so HUD specifically excluded those situations as possible exemptions to the rule.

The text of the interim rule can be found in 24 CFR Part 203, or by visiting the ALTA website at www.alta.org and looking under "Government News," or by going to the following link: http://www.alta.org/govt/issues/04/69fr77114.pdf