On February 3, 2016 the U.S. Congress voted in favor of H.R. 3700, a bipartisan bill which among other things, included a number of significant changes to the FHA condominium approval process. For those who are not familiar with this saga, the “condominium approval process” refers to the process by which a condominium association is approved for FHA mortgage insurance guarantees.
The approval of a project by the FHA is a key component that helps make housing accessible and perhaps more affordable, although it may be debatable at this point whether there is any housing in the U.S. that is truly “affordable” for the majority of working class Americans. While it may also be debated as to whether or not it is wise to encourage people to purchase a condominium rather than a single-family home, the fact is that for many people there is little or no alternative.
A bit of background is required to fully grasp the significance of the changes imposed by H.R. 3700:
After the housing market crashed in 2008-09, the Federal Government was left holding the bag on millions of mortgages as a result of borrowers who defaulted on FHA and VA insured mortgage loans. Many of these loans involved condominiums and other forms of attached, common interest housing.
As the FHA and its overlord, The Department of Housing and Urban Development, started to look at all of these condominium loans it became apparent that they had a real problem on their hands in the form of the countless condominium units that the agency was now responsible for which were located in HOAs that were fiscally bereft to say the least.
The problem was exacerbated by the large number of condominium units that had fallen into the hands of the Feds, which were located in older buildings, badly in need of repair. In certain areas of the country such as Florida, the problem reached almost epidemic proportions.
As the dust started to settle and it became apparent that the Federal Government was the defacto “owner” of the majority of the units in many older, decaying buildings which had been under the stewardship of a homeowners association that had failed to set aside adequate reserves, The FHA’s technical underwriters began to see that they had a real problem on their hands. To prevent this problem getting worse the FHA’s team of technicians proposed changes to the mortgage underwriting guidelines as well as the process for gaining approval for an FHA mortgage insurance guarantee.
Without boring everyone to death with too many intricate details, suffice to to say that the industry rallied in opposition to many of the proposed changes. The fear was that any significant changes which made FHA approval process any more difficult would only undermine any potential “recovery” in the housing market, which by this time was limping along in survival mode with the carcasses of the sub-prime mortgage bust piled high in almost every major city in America.
But I digress…The point is that we now have H.R. 3700 which includes several very important changes to the FHA condominium approval process that may appear on the surface to be a good thing for home buyers, but which in the long run are likely to have a detrimental impact on condominium associations that are approved under the revised rules.
First of all the bill extends the period of certification from a two year certification to a period that is apparently undetermined at this point. Less government regulation is good you say?
Maybe, maybe not…the lengthening of time between certifications results in less frequent inquiries by federal officials and it also allows more time for the finances of an association to become derailed before outside examiners are again required to evaluate the organization. To put it in simple terms, once an HOA receives its initial certification there will be more time for things to go wrong before government regulators are again required to evaluate the fiscal stability of the HOA.
To add fuel to this simmering fire, the bill also requires the FHA to consider relaxing the re-certification process, which at the moment requires that each association seeking approval for FHA’s mortgage guarantee program must go through essentially the same certification process every two years. Under the new guidelines the “re-certification” process will only involve an “information update,” whatever that means?
In all likelihood it means that the application will not be subject to rejection if it didn’t meet the original certification requirements at the time a re-certification application is submitted. This is an important distinction because under the previous guidelines a project would have been denied approval if it didn’t meet the same certification criteria that was required to obtain certification in the first place.
The Bill will also require the FHA to “clarify” the permissible percentages for primary and secondary residences in order to meet the approval criteria. If the Administration fails to issue new standards within 90 days of the enactment of H.R. 3700 into law, the percentage units that must be maintained as primary and secondary homes will automatically be set at 35%.
If this were to occur it means that the percentage of non owner-occupied rental units could be as high as 65% and the property would still qualify for FHA mortgage guarantee. Again, this is a significant change to the current rules for two reasons:
1. It creates a situation where inaction becomes action. If the FHA fails to clarify what percentage of primary and secondary homes will be, the percentage of non owner-occupied units allowed under the new guidelines will automatically become 65%.
2. If the percentage of owner occupied units ends up becoming 35% it means the number of non owner-occupied within an FHA approved condominium can be as many as two out of three units. A situation that is all but certain to lead to the decline of many condominium communities.
The lack of a clearly defined standard is a flaw in the legislation that opens the door for; a) a potentially negative outcome if the FHA fails to act and; b) a standard that is not actually approved by Congress but is left up to the administrative process to determine.
If a new standard is established by the FHA and it is contrary to the various vested interests, there is sure to be more pressure brought to bear in an effort to set the standard at a level that makes it easier for condominiums to be approved, while increasing the number of non owner-occupied units in many condominium communities.