A proposal the Department of Housing and Urban Development believes would put an end to the illegal "flipping" of properties by speculators has drawn criticism from both real estate professionals and lenders.

While saying they, too, want to stop abusive flips, both the National Association of Realtors and the Mortgage Bankers Association say they have grave concerns with the HUD proposal that would deny Federal Housing Administration (FHA)-insured mortgages on houses that have been sold within the last six months.

HUD is concerned about transactions in which a buyer purchases a foreclosed house, makes a few cosmetic repairs and then resells the place often in a matter of days at hugely inflated prices. By imposing a six-month "holding period," houses needing government-financing could not be sold so rapidly.

HUD believes by making it difficult for get-rich-quick scam artists to get rich so quickly, they would lose interest in flipping properties to unsuspecting buyers move on to another scheme.

To prevent unscrupulous investors from turning over properties that they have only contracted to buy but have not taken title, the government also wants to require that sellers be listed on sales contracts as the owner of record.

But NAR says the proposed changes in FHA regulations would discourage legitimate investors "some of whom are Realtors" from making a living at buying and refurbishing distressed properties and returning them to the nation's housing inventory at fair market value.

While fixing up rundown houses can't normally be done overnight, NAR says in its comment letter to HUD, "there are many legitimate rehabilitation projects that require less than six months to complete." Consequently, the six-month time-out "could subject properties to continued deterioration and/or vandalism," making them more expensive to repair and leading to further deterioration the neighborhoods where they are located.

Besides, the politically powerful 800,000-member trade group pointed out, there are numerous ways to manipulate or circumvent the suggested rules. For example, the cost of the six-month holding period could be built into the already overblown selling price. Or the property could be sold under a lease-purchase agreement in which the buyer takes occupancy during the time-out as a tenant.

The MBA's main concern is about the additional paperwork and cost the rule changes could foist upon lenders and sellers.

HUD's estimate of the additional burden is "woefully inaccurate," the lenders' group says. Whereas HUD indicates the extra underwriting and processing steps necessary to comply will result in only an additional 250 man-hours a year for each lender, the MBA figures it will be something more on the order of 200,000 hours annually.

To reduce the load, the MBA recommends imposing the six-month holding period only of those properties on which the selling price is at least 10 percent greater than the seller's acquisition cost. This would not penalize people who lose their jobs, have a sudden illness, a death in the family or must sell because of some other unforeseen but legit reason.

Under these conditions, the lender group points out, sellers are not usually seeking big profits but rather just enough to get out without losing any money.

For more articles by Lew Sichelman, please press here.

Published: December 10, 2001

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.