Though officials haven’t given the specifics, the Federal Housing Administration (FHA) is gearing up for changes to its highly controversial rules that have rendered a large number of condos as ineligible for the agency’s low-down-payment insured mortgages. This will be refreshing news to the thousands of condominium owners and buyers throughout the United States regarding mortgage financing.
The revisions could remove some of the hurdles that have dissuaded condominium homeowner association boards from seeking FHA approval or recertification of their buildings for FHA loans over the last 18 months. According to the agency’s current regulations, individual units in a building cannot be sold to buyers using FHA-insured mortgages unless the property, as a whole, has been approved for financing.
According to builders, lenders, condominium experts and realty agents, the FHA’s guidelines have become too strict and have cut buyers from their best source of low-cost mortgage funds, thereby frustrating the real estate recovery that the Obama administration says it advocates.
Christopher L. Gardner, managing member of FHA Pros, a national consulting firm based in Northridge that assists condo boards in obtaining FHA approvals, said only 25 percent of all condominium projects that are potentially eligible for FHA financing are approved. That is, despite the fact, Gardner said, that FHA financing is the number one mortgage choice for half of all condo buyers and is critical to many first-time and minority purchasers.
Moe Veissi, president of the National Association of Realtors and a broker in Miami, said the FHA’s overly strict rules “have had an enormous impact on individuals” across the United States, especially owners of condo projects who find they are unable to sell their units because their condo board has not sought or obtained approval from the FHA which is a direct result of objections to the FHA’s strict criteria. This, in turn, depresses the prices that unit owners can obtain and ultimately harms their equity holdings and financial futures as well, Veissi said.
FHA officials ardently defend their requirements as being prudent and necessary to avoid insurance fund losses but have expressed a willingness to reconsider some of the concerns that have been disconcerting to the real estate industry and condo owners. Among the largest areas of contention of the agency’s rules are its limitations on:
• Non-owner occupancy. The FHA requires no more than 50 percents of the units in a building or project be non-owner-occupied. This rule alone has caused large numbers of condominiums in hard-hit markets to be ineligible for FHA financing, where investors purchased units for cash specifically to turn into rentals.
• Delinquent condominium association fee payments. The agency refuses to approve a project where more than 15 percent of the residences are 30 days or more behind on condo fee payments to the association. Considering the dismal state of the economy, this has been a significant problem for thousands of associations, even those in relatively prosperous markets.
• Non-residential space usage. The agency has set a cap of 25 percent of the total floor space in a project for commercial use. Critics say this is unrealistic and too low for condo projects in urban areas, where office and retail revenues are often important to overall financial feasibility.
The FHA has imposed a long list of other requirements on reserves and insurance, plus a highly controversial rule that associations interpret as creating harsh legal liabilities for condo board officers, if applications for FHA approvals contain inaccuracies.
The agency is expected to clarify the personal liability language as well as make other modifications in its forthcoming rules. Whether the changes will be enough to persuade homeowner boards to apply for approvals in large numbers is uncertain, at best, but industry experts say that they and unit owners are likely to welcome whatever loosening of the current restrictions FHA can offer.