Congressional Democrats and Republicans haven’t agreed on much lately, but they’re together on one issue that affects condominium buyers and sellers across the country: The Federal Housing Administration (FHA) has bungled its condo finance program.
In a rare moment of bipartisanship before heading home for the summer, the Senate unanimously passed legislation that will require the FHA to lighten up on its condo financing regulations and make low-down-payment FHA loans more available to the people they are supposed to serve – moderate-income buyers, many of them minorities and first-time purchasers, who turn to condominiums as their most affordable option. The vote in the Senate followed a 427-0 vote in the House earlier this session.
Passage of the legislation came after several years of complaints by housing, community association and other groups about FHA’s overly strict requirements. Critics pointed out that FHA once was the go-to source of condo financing for first-time buyers, but since 2010 its role has shrunk drastically. FHA helped finance 80,000 to 90,000 condo mortgages a year during the previous decade and a half, but more recently production has dwindled to barely a quarter of that volume. FHA condo lending in the first three months of this year plunged by 8.6 percent from the previous quarter, according to Inside Mortgage Finance, a trade publication. In the final quarter of last year, volume declined by 20.3 percent from the third quarter.
The agency’s restrictions on condo community eligibility for financing became so onerous – requiring complicated re-certifications of entire developments every two years – that thousands of condo associations abandoned the program. According to the Community Associations Institute, fewer than 14,000 of the 152,000 condo associations in the U.S. are now eligible for FHA loans. Individual units are not eligible for FHA financing unless the entire association’s finances, reserves, insurance, budget and other items have been approved by the government.
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The bill (H.R. 3700) aims at correcting a number of key problems by:
▪ Ordering the FHA to streamline the entire re-certification process for condo associations and make compliance “substantially less burdensome.” Condo experts predict this alone could convince significant numbers of associations to return to the FHA fold, thereby opening up sales and purchases to thousands more condo units.
▪ Reducing the minimum owner-occupancy ratio from the current 50 percent to 35 percent, unless FHA can provide justification for a higher percentage. Seth Task, a realty agent with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says the 35 percent ratio will allow “substantial” numbers of developments that can’t quite meet the 50 percent test to get back into the FHA program. In an interview, he cited the ease of an elderly condo owner who listed her unit for sale with him recently, but the owner occupancy ratio in her development was 49 percent. Ineligible for buyers using low down payment FHA loans, she tried unsuccessfully to sell and ultimately had to accept an offer $10,000 below what she could have obtained if her building qualified for FHA financing.
▪ Allowing transfer fees. The legislation directs the FHA to stop rejecting condo communities because they collect small transfer fees when units are sold. The funds collected are used to support association activities – they benefit all residents. FHA will now have to follow the lead of Fannie Mae and Freddie Mac, both of whom consider community-benefit transfer fees acceptable.
▪ Providing more flexibility on the amount of commercial space permitted in condo developments. Some urban condos are designed for mixed-use – residential and commercial combined – because that’s what makes economic sense in their locations. Under current rules, some of these developments are ineligible because FHA considers their commercial component excessive. The legislation directs the agency to be more flexible and to take the local market context into account.
Will these changes be sufficient to revive FHA’s sagging condo program? “We are cautiously optimistic,” said Dawn Bauman, senior vice president at the Community Associations Institute, which represents nearly 34,000 condo communities and management organizations. Rita Tayenaka, past president of the Orange County (Calif.) Association of Realtors, told me the bill “is a good thing but will not be the end-all” in resolving FHA’s condo woes.
Most analysts agree that the actual effects will depend on two things: how quickly FHA puts its revised procedures into the field, and whether thousands of condo associations who’ve fled the program conclude, “OK they’ve cut the red tape, maybe it’s time to jump back in.”