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New Rules Target House Flipping (Update 1)

Updated with comments from Pepper Hamilton attorney Frank Mayer.

NEW YORK (TheStreet) -- Home flippers beware: Federal bank regulators are getting tough on appraisal requirements for properties that are quickly resold.

As required under the Dodd-Frank banking reform legislation, federal regulators -- including the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Consumer Financial Protection Bureau -- proposed a strict set of appraisal requirements for "higher-risk" mortgages.

The "higher-risk mortgages" subject to the new appraisal rules are loans with rates that are:

  • 1.5 or more percentage points higher than "the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set," for a first-lien loans with balances not exceeding 80% of the home's value, for a one-to-four family dwelling, with some exceptions.
  • 2.5 or more percentage points higher than the APOR for a first-lien loans with balances exceeding 80% of the home's value.
  • 3.5 or more percentage points higher than the APOR for a second-lien mortgage loan, or for a reverse mortgage.

The new rules exclude "qualified mortgages," which are mortgage loans that conform to the rules of Fannie Mae (FNMA) and Freddie Mac (FMCC), allowing the lenders to quickly sell new loans to one of the government-sponsored mortgage giants.

The changes to Regulation Z -- which implements the Truth In Lending Act -- require lenders who accept applications for higher-risk mortgages to require a "a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property." During the real estate bubble, many lenders relied on market value estimates when extending mortgage credit, rather than an actual appraisal.

The lender will also be required to obtain a second written appraisal, "at no cost to the borrower," if the new loan "will finance the acquisition of the consumer's principal dwelling," or if the loan will "finance the purchase or acquisition of the mortgaged property from a seller within 180 days of the purchase or acquisition of such property by the seller at a price that was lower than the current sale price of the property."

So in the case of a quick flip by the seller, the lender must pay for a second full appraisal from a different appraiser, that "must include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale." Not only does this create significant additional cost for the lender, it puts a serious amount of responsibility on the second appraiser.

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