Good news: FHA is working on revised condominium regulations.
It’s mum about the details and timing, but John Anderson, a broker with Twin Oaks Realty in Minneapolis-St Paul, Minnesota, has some blunt recommendations to help FHA get its revisions right:
- Chuck the current blanket 50 percent owner-occupancy requirement. It’s stricter than Fannie Mae and Freddie Mac’s standards and it unfairly prevents condo unit sales to credit-worthy buyers simply because the project as a whole doesn’t qualify.
- Soften up on the project certification rules. They are still "scaring away condo boards" from seeking certification and thus closing the doors to FHA-financed purchasers.
- Dump the current "concentration" limit of 50 percent that prohibits FHA insured loans on units if FHA financing already covers more than half of the units in the project.
- Relax the requirement that no more than 15 percent of the total units in a project can be 60 days late on homeowner association fees. Kick that up to maybe 90 days delinquent — a more practical, real-world standard for volunteer condo boards — and grant project-by-project exceptions when an association has adequate funds to handle operations.
Anderson, who says 65 percent of his real estate transactions are with FHA buyers and sellers, believes that FHA made a good start on fixing its controversial condo rules last September with "temporary" guidance in a mortgagee letter.
But even with those changes, he says, "FHA still needs to become proactive and reach out" to the thousands of condo boards across the country who find the entire FHA project certification process to be too complicated and worrisome for them to bother even trying to sign up with the agency.
To illustrate the problem, Anderson, a member of the National Association of Realtors’ housing policy committee and an expert on condo issues, says he has three units listed for sale right now. All three are located in condo projects that once were certified for purchasers using FHA financing. But all three associations also let their certifications lapse after seeing FHA’s initial recertification proposals several years ago.
Why? They didn’t want to take on the legal liability the certification procedures, with potential fines up to $1 million and prison terms for board officers who sign documents that later turn out to have errors or omissions. And the three boards didn’t like all the tough restrictions that continue to set FHA apart from conventional financing.
"A lot of my buyers want to go FHA," Anderson told me last week, but they can’t find projects that are certified and in their price range.
The mass exodus of condo associations from the FHA program got so bad that last year, before the announcement of the temporary guidelines that relaxed certain rules, only 2,100 out of a potential 25,000 condo projects around the country had bothered to retain certification.
The situation hasn’t gotten much better in the months following release of the guidelines. According to data provided to me by FHA, there has been no significant increase in the monthly number of applications the agency is receiving from condo associations for either new certifications or recertifications.
The agency insured approximately 45,000 condo unit loans during the 2012 fiscal year — down from 55,000 loans the year before, and less than half the 110,000 target projection made at the start of the fiscal year.
Andrew Fortin, vice president of government affairs for Associa, a Dallas-based national homeowner association management firm, says FHA frightened away so many condo boards with its certification rules that some state legislatures are now considering — and in one case, Virginia, have approved — new statutes requiring boards to disclose up front to potential unit purchasers whether the project as a whole has obtained certification from FHA.
The idea, says Fortin, is that FHA is pretty much the only game in town if you’re a first time or moderate income shopper with limited resources for a down payment on a condo. Though legislatures cannot require boards to apply for FHA certification, Fortin says they can at least make sure the unit financing status gets flagged out front.
Not only does mandatory disclosure alert shoppers about the potential non-availability of affordable financing for a condo unit in a project, it also highlights for board members — along with individual unit sellers and the sales agents they hire — that the failure to seek or even pursue FHA certification, nettlesome though the process may be, can vitally affect the ability of owners to sell, and thus the market value of individual units.
Bottom line on FHA and condos: Industry groups such as NAR are preparing quiet campaigns to influence the final shape of the upcoming condo rules to make them more acceptable for a wider swath of associations than at present. FHA, in the meantime, is focused on cutting its insurance fund losses by tightening up underwriting and raising insurance premiums. Congressional Republicans are pressuring Commissioner Carol J. Galante to avoid any changes that increase the likelihood of a Treasury bailout later this year.
Whether the agency can find a way to relax its rules under the present intense congressional scrutiny is an open question.
FHA isn’t talking. But officials say it’s committed to issue revised regulations that provide key answers sometime in the months ahead.