New FHA Condo Rules' Risks and Rewards

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.