WASHINGTON — When you hear that the Obama Administration plans to extend a policy that allows low-down-payment financings of "flipped" houses for 2011, your first reaction might be: No way.
Is high-leverage house-flipping the type of activity the federal government should be encouraging?
A classic real-estate flip involves the quick resale of a house or condominium at a significantly higher price than the purchaser paid with only cosmetic improvements to the property, if any at all.
Sometimes only the contract itself is being signed over to a new buyer at a higher price.
The administration plan has no connection with deals like these, although the word "flipping" is in its title.
For years, the federal government had prohibited the use of FHA mortgage financing by buyers purchasing houses from sellers who had owned the property for less than 90 days.
The idea was to prevent speculators from defrauding the government through quick flips of houses — usually involving straw buyers and corrupt appraisers — at wildly inflated prices.
One side effect, however, had been to stifle purchase-and-renovate projects by legitimate small-scale investors who buy houses after foreclosure or loan defaults and then resell them in substantially improved condition.
In many parts of the country, first-time and moderate-income buyers often sought to buy these houses using FHA-insured mortgages with 3.5 percent down payments but were prevented from doing so by the long-standing "anti-flipping" rules.
This, in turn, left large numbers of foreclosed houses sitting vacant, deteriorating, and unsold, with negative effects on the values of neighboring properties.
Last January, FHA Commissioner David H. Stevens announced a one-year suspension of that rule. The plan had key safeguards for purchasers, including inspections and multiple appraisals in some cases to document the amounts spent on the improvements.
Paul Wylie, who with a group of partners and contractors specializes in acquiring, renovating, and reselling foreclosed and distressed houses in the Los Angeles area, says the government's policy "has been a very positive approach" because "it recognizes the role that [private investors] can play in helping the housing market get back on its feet."
In the LosAngeles market, he said, FHA financing now accounts for 40 percent of all home purchases and 60 percent of purchases in predominantly Latino and African-American communities.
Buying foreclosed houses "comes with a lot of risk factors," said Mr. Wylie.
"There's no title insurance, we don't have a good idea of the extent of the defects" inside properties that have been sitting vacant or vandalized for months, he said.
Some houses have delinquent property taxes, which Mr. Wylie's group typically must pay.
But most of the Wylie group's houses sell at prices more than 20 percent over what Mr. Wylie paid at acquisition — a quick turnaround gain that potentially works for buyers, sellers, neighborhoods, and the FHA.