Could the Federal Housing Administration finally be opening its doors again to financing more condominium units? If so, that could be excellent news for young, first-time buyers and for seniors who own condo units and need a reverse mortgage to supplement their post-retirement incomes.
Here’s why: FHA financing not only offers down payments of as little as 3.5 percent but also is far more lenient than other options on crucial issues such as credit scores and debt-to-income ratios. In addition, FHA is the dominant source of insured reverse mortgages — the only game in town for the vast majority of seniors.
But if a condo building is not certified as eligible for financing by FHA, all the individual units in the project are also ineligible for FHA mortgage financing. Young families can’t buy using FHA loans, sellers can’t sell and seniors can’t tap their equity through a reverse mortgage. It used to be different — for years, FHA allowed what are called “spot” loans on individual units — but no more.
But maybe things are about to change. In a speech last week to the National Association of Realtors, Housing and Urban Development Secretary Julián Castro said revisions to controversial FHA rules on condos have been completed and only await final Obama administration approval. The changes would simplify controversial certification procedures for condo buildings and amend other rules that have knocked thousands of condominium buildings out of eligibility.
Since adopting highly restrictive qualification rules early in the current administration, FHA — once a major player in the condo field and the go-to source of financing for moderate-income purchasers — has steadily seen its market share shrink. FHA once financed 80,000 to 90,000 condo units a year, but last year’s volume fell below 23,000. Many condo homeowner associations began losing their eligibility several years ago and because of what they consider onerous recertification requirements have never sought to reapply.
Castro provided no details on what changes are coming. But real estate and condo industry sources say they may build upon reforms announced last November that appear to have had at least modest success in encouraging condo homeowner boards to get onboard again.
Two California-based consultants who help associations and community managers work through the certification hoops told me they’ve seen a jump in activity in recent weeks. Condo boards that had been resistant to the FHA rules “aren’t fighting them as much anymore,” says Natalie Stewart, president of FHA Review. “People need to sell their homes, people need to buy” affordable condo units, so some associations grudgingly are returning to the FHA fold.
Jon Eberhardt, president of Condo Approvals, said “we certainly have seen an uptick” in FHA certification applications. “I wouldn’t call it monumental, simply a steady growth” in the wake of last November’s changes, he added.
Dawn Bauman, senior vice president for government affairs at the Community Associations Institute, a Virginia-based group that represents 33,000-plus condo and homeowner associations and managers, said that she has also detected “an increase in the number of applicants” for condo certification and that regional FHA offices have been “more flexible” in recent months in evaluating applications.
What will be crucial to continuing the positive trend, industry experts say, is for the upcoming guidelines to make changes beyond simply streamlining condo certifications.
On the list of needed reforms:
●The return of spot loans. That alone would significantly expand opportunities for millennials, minorities and seniors.
●An end to FHA’s blanket prohibitions against community-benefit homeowner transfer fees that are collected by some condo associations when units change hands. In California, this ban has led to the loss of thousands of units from FHA financing — a huge problem in areas where affordability is tough and condos are the lowest-cost alternative for many consumers.
●Relaxation of strict limits on commercial space in residential condo properties. Revenues from commercial leases are important to the financial health of urban condominiums, but current FHA caps render many buildings ineligible.
Since officials at FHA are mum about what’s in the upcoming package of regulations, it’s not clear how much — if any — of this might be included. But the same officials have to know there’s congressional action hovering in the wings: Bipartisan remedial legislation (H.R. 3700) passed the House in February by a 427-to-0 vote and is pending in the Senate. The bill would require a dramatic streamlining of current rules and other changes designed to revive the condo financing business at FHA.