New FHA Condo Rules’ Risks and Rewards

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Back in July, President Obama signed HR3700 The Housing Opportunity Through Modernization Act of 2016.  The law makes a number of changes in existing
housing regulations including the methods under which housing assistance is
certified and delivered.  It also changes
rules condominium complexes must meet to be eligible for Federal Housing
Administration (FHA) insurance.  New rules
have been promulgated under the legislation by the Department of Housing and
Urban Development (HUD) and are now in the 90-day comment period.

Jacqueline Doty, CoreLogic
Vice President for Product Management and Collateral Risk Solutions, writing in
the current issue of MarketPulse says
“It is time to make a clear-eyed assessment of the risks and rewards that HR
3700 will bring.”  While it is great the
Congress has acted to ease regulations that made FHA condo loans difficult to
get, “are the proposed rules being discussed during the current comment period
the best way to do this?”

According to the Library
of Congress’s summary of the condominium portion of HR 3700,

  • FHA must modify
    its certification requirements for condominium mortgage insurance to make
    recertifications substantially less burdensome than original certifications and
    may consider lengthening the time between certifications for approved
    properties and allowing information to be updated rather than resubmitted.
  • A HUD field office must make decisions
    regarding exemptions to current FHA commercial space requirements and consider
    factors relating to the local economy.
  • FHA must adopt the standards of the Federal
    Housing Finance Agency (FHFA) relating to private transfer fee covenants that
    currently apply to condos eligible for purchase/guarantee by Freddie Mac and
    Fannie Mae (the GSEs)
  • FHA must also adopt the existing FHFA
    rules about the percentage of units that must be owner occupied. FHA’s current standard is 50 percent, the GSEs
    require only 35 percent.

Doty says “Less burdensome rules are good. 
But prudent assessments have to be made on whether the rewards outweigh
the risks
.”  She points to one example,
spot loans, which the law allows to be made to individual buyers of non-FHA certified
condo projects.  FHA has reversed
positions on these loans several times over the years but will now allow them
again.  HUD has endorsed this change.  She says this will increase risk to the FHA
insurance fund, because FHA will be insuring loans in less financially stable properties.  At the same time, HUD wants the 35 percent
owner-occupant standards to be changed to a range from 25 to 75 percent.

The National Association of Realtors® (NAR) had championed the passage of HR
3700 but is unhappy with HUD’s proposed modification of the occupancy standards
set out in the law and has asked its member to weigh in.  Doty says the last time NAR asked this of its
members to respond to a HR 3700 issue Congress was flooded with more than
140,000 comments.

She says Congress wasn’t overly prescriptive in drafting and passing the
legislation and gave HUD a great deal of latitude on interpreting it but these
decisions should incorporate as much relevant data and analysis as
possible.  One of the difficulties in
condo lending is the lack of standardization. 
There is not, she says, even a standardized questionnaire for assessing
project eligibility.

Condominiums are often the most affordable housing available, especially for
seniors, first-time and low and moderate income buyers and some reforms are necessary
to make buying and financing them easier. 
Doty said this is demonstrated by the dramatic fall in FHA condo lending
in recent years – during the first quarter of 2016 it was down another 8.6
percent.

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