Good news for Realtors, lenders and condominium unit owners who’ve been frustrated by FHA’s prohibition of “spot loans” in developments that haven’t obtained certification: The agency is now seriously exploring how to relax its ban and bring them back.
Officials are mum on the details and timing, but they confirmed to me on Friday that reviving this key financing option is now under active study. The main reason: FHA is under growing political and trade group pressure — NAR and the Community Associations Institute especially — to do so.
Spot loans are important for sellers whose condo associations’ boards of directors have chosen not to apply to FHA for approval of the entire development. Under current rules, without FHA certification of the project as a whole – based on evaluations of the association’s financial accounts, reserves, insurance, renter-to-owner ratio and a long list of other factors – no unit in the development is eligible for an FHA mortgage.
The ban hits moderate income, first-time and minority buyers hard, given the agency’s unique role in assisting them attain homeownership.
Spot loans also are crucial for existing unit owners who want to obtain a reverse mortgage to tap their equity. FHA’s home equity conversion mortgage (HECM) program dominates the reverse mortgage field and accounts for an estimated 90 to 95 percent of all volume. Without access to FHA, seniors who live in a non-certified condo project are cut off from a major potential source of needed cash to pay bills and support their retirement years.
Spot loans can directly affect selling prices of condos. Unit owners frequently lose money when buyers need to use low down payment FHA financing but the project is ineligible. Seth Task, a realty team leader with Berkshire Hathaway Home Services Professional Realty in Solon, Ohio, told me one of his clients recently had to sell her unit for $10,000 below the initial list price solely because of FHA’s spot loan prohibition.
Qualified buyers with good credit submitted a contract close to the $149,900 list price, said Task, but the offer had to be turned down because of the FHA spot loan prohibition. The seller ultimately signed an all-cash contract “in the upper $130,000s,” according to Task, who is vice chair of NAR’s federal financing and housing policy committee.
From 1996 to 2010, FHA permitted spot loans in condo projects, but did not have adequate management, monitoring and quality control measures in place. Eric Boucher, an FHA condo approvals specialist with ReadySetLoan Condo Team LLC in South Windsor, Conn., says the inevitable result was that some developers and loan officers took advantage and obtained FHA-insured loans on units in projects that did not meet even minimal standards. Sometimes the loans were secured by structures that didn’t even qualify as legal dwelling units.
In one particularly egregious example, said Boucher, a motel in Florida that was converted to a condominium received FHA spot loans on every unit the building, even though not one had a kitchen.
But because FHA lacked the administrative capacity to carefully review and process loan package submissions and track spot loan endorsements project by project, the loans were all approved. Fraud and misuse of the program became significant enough problems that when FHA revamped its condo activities in 2010 and instituted a rigorous certification process to identify eligible developments, it banned spot loans outright.
Though certification is controversial and thousands of condo boards have declined to apply, FHA officials say they now have much better oversight and management controls in place. They also note that in any resumption of spot loans, much stricter standards would be in place for a unit to qualify, along with much more intensive monitoring.
An attendee at a recent FHA-sponsored private roundtable for condo professionals quoted a senior official say saying that any new version “won’t be your father’s spot loan program.”
Philip J. Sutcliffe, a principal in Project Support Services I LLC, a condominium financing expert in Lansdale, Pa., says that if FHA brings back spot loans — which he finds troubling, given the potential for abuse — he would recommend that the underlying non-certified projects get the same level of rigorous review that certified projects do.
That would severely cut down on the speed and add to the expense of approving a spot loan, but would at least provide a responsible option for sellers and buyers that currently does not exist.
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.