What to expect from FHA’s pending condo rule revisions

Officials shed light on issues to be addressed

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WASHINGTON — When acting FHA commissioner Carol Galante told a standing-room-only audience at NAR’s midyear meeting last week that "we have heard you" on condominium issues — and that FHA would publish revisions to the agency’s controversial rules "very, very soon" — she provided no details about what specific modifications the industry and consumers could expect.

Some audience members speculated: Will the changes be enough to bring back FHA financing of individual condo units to thousands of communities across the country that no longer are certified?

Will they be enough to open up financing to first-time buyers who seek to use low down payment FHA loans in places like Las Vegas, Miami, Phoenix and dozens of other markets where investors have purchased large percentages of condo projects, rendering them ineligible for FHA approvals under current rules?

Could Galante and HUD simply throw in the towel and scrap — or suspend — the whole package of heavily criticized requirements, given the sharp decrease in FHA condo volume this fiscal year?

Though Galante declined to offer specifics, background discussions I had with federal officials last week for Inman News provided some broad directions on what to expect — and what not.

First, there’s zero chance the whole package of rules will be put on ice or withdrawn. The rules were adopted following FHA studies of key factors associated with high default and claims rates in condos, plus a general perceived need to keep in much closer touch with the financial health of condo projects — their budgets, reserves, insurance coverage and compliance with state and local regulations that could affect their viability.

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However, there’s an excellent chance that some of the specific requirements that have bugged associations and unit sellers will be modified in a two-step process scheduled to begin shortly. FHA plans to issue a mortgagee letter to lenders in the near future that revises a number of the current rules.

But it’s also working on drafting a full-blown regulatory proposal that will allow the industry and public to weigh in on the pros and cons of the proposed rules — an opportunity that was conspicuously absent when the current rules were promulgated.

Once those comments are digested, the agency will publish final regulations designed to govern the condo financing program for the long term. Timeline on that: Probably sometime in 2013. During the interim, the rule changes outlined in the soon-to-arrive mortgagee letter will be in effect.

So where’s the meat here? What areas of the current rules are most likely to be changed?

High on the list: The agency intends to soften and clarify some of  the "project certification" language in the current package that condo associations and builders must sign. In its current form, the certification has terrified many condo board officers — typically volunteers from the resident base — that they are assuming overly broad, lifelong legal responsibilities to inform FHA every time there is a material change in any of the information submitted, including enactment of state or local regulations that might affect the project. Under earlier rules, condo association attorneys could take on legal liability for the accuracy of the submission.

The current language also requires condo board members to attest that they have "no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit" to become delinquent, including "disputes concerning unit owners" and "dissatisfaction among unit owners about the operation of the project or the owners association." Any board member who "knowingly and willfully" submits information found to be false to FHA as part of the certification is subject to fines up to $1 million and 30 years in prison.  

Andrew Fortin, former government affairs head for the 30,000-member Community Associations Institute (CAI) and now vice president of the national management firm, Associa, asks, "Would YOU sign something like this?" Homeowner association leaders in droves have declined to, and their projects are among the thousands no longer certified by FHA for unit financings.

Other changes coming:

  • Condo fees in arrears. Under the current rules, no more than 15 percent of the total units in a project can be more than 30 days past due on the condo fee payments. Look for an extension of the delinquency standard beyond 30 days — maybe double or triple that timeline — or an increase in the percentage threshold beyond 15 percent.
  • Investor ownership limits. The rules now prohibit more than 10 percent of the units in a project from being owned by a single investor. This has created significant problems when a developer sells out most of a project but retains an unsold portion in its own name for a period of time, for sale or rental. Look for a relaxation of the rules here.
  • Concentration of FHA loans. Currently no more than 50 percent of the units in a project can carry FHA financing — a limit that creates problems for some projects aimed at lower and moderate income buyers, who are often first-timers and minorities. FHA is looking hard at raising that ceiling.  
  • Non-residential, commercial space. The agency now limits a project’s commercial usage to 25 percent of total floor space. This is tough on some condos in urban areas where retail or office space rents help pay the bills, but the requirement is likely to be changed to accommodate those projects’ needs.

One  controversial area that may not see much in the way of modification: Non-owner occupancy. The current rule limits rentals to 50 percent of all units. FHA believes this standard is consistent with Fannie Mae and Freddie Mac rules, though there could be some wiggle room if second home/vacation home units are counted on the owner-occupied side of the ledger.

Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.

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