Critics say FHA's condo financing rules are unfair
Democrats and Republicans on Capitol Hill don't agree on much lately. But a bipartisan coalition of 56 House members has come together to file a protest about a housing issue that's been festering since 2011: the federal government's dramatically diminished role in helping buyers finance condominiums.
In a letter to Housing and Urban Development Secretary Julian Castro, the congress members complained that the Federal Housing Administration has imposed "significant restrictions" on condo financing, despite the fact that condo units often are "the most affordable homeownership options for first-time buyers, small families, urban and older Americans."
A HUD spokeswoman said the department is reviewing the letter but had no immediate response.
The House members' condo complaints come in the wake of sharp criticism from condo owners and buyers, condo association boards, builders and real estate agents over the Obama administration's failure to maintain the FHA's once prominent role in helping to finance condos, especially in the starter-home, moderate price ranges. During the past decade and a half, low down payment FHA-insured mortgages sometimes financed 80,000 to 90,000 condo purchases annually. But since 2011, those numbers have been plummeting.
During 2014, they totaled just 22,800 loans. Through August of this year, condos have accounted for just 2.8 percent of FHA loan volume.
As the result of onerous new "recertification" procedures, which require entire condo developments to pass prescribed standards or be banned from FHA lending on any individual units, only about 20 percent of previously eligible developments can now use FHA financing. This reduced number, in turn, represents barely 10 percent of the total market for condominiums, according to congressional estimates. The agency has also imposed a variety of other requirements -- tight limits on the percentage of rental units in any one project, caps on the amount of commercial space a project can have, restrictions on fees that many condo associations depend upon to support their activities -- that have frustrated buyers and sellers across the country.
In one large condo development in Orange County, California, the condo association's inability to deal with FHA's rules has knocked 7,000 units out of eligibility for favorable low-down-payment financing, according to Rita Tayenaka, president of the Orange County Association of Realtors. The ineligibility not only makes it impossible for would-be purchasers to use an FHA loan to buy a condo unit in the development but also reduces the ability of current owners to refinance or to sell. Condo owners who are seniors have been cut off from the dominant source of reverse mortgage money -- FHA's home equity conversion program, which provides more than nine out of 10 reverse mortgages nationwide, according to lending industry estimates.
"It's been very frustrating trying to work with FHA" to solve these issues, Tayenaka said in an interview. "Nothing happens."
Seth Task, a real estate broker with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says FHA problems with condos are "a daily occurrence." He cited the recent example of a buyer who was preapproved to purchase a $145,000 condo unit with an FHA loan. But because the condo development was no longer certified under FHA rules, the buyer could not obtain a mortgage. Weeks later, the unit sold to an all-cash buyer for $139,000 -- a $6,000 loss in value for the seller.
FHA's current rules are "not fair to millennial buyers" who need low down payments and favorable credit underwriting, said Task, and they're "not fair to sellers."
The condo drought at FHA is beginning to stimulate more than congressional letters of protest. Last week a House subcommittee heard testimony on a bill (H.R. 3700) that would mandate many of the changes critics have been demanding.
HUD officials in earlier years have explained that the tightening of rules governing condo financing were prompted by losses FHA suffered in connection with fraudulent condo mortgages originated in Florida during and immediately after the housing crisis in 2009-2010. Yet the agency's own data now show that FHA's overall portfolio of insured condos has been performing 22 percent better -- that is, producing fewer defaults and losses -- than the agency's regular single-family home loans, according to Brian Chappelle, a principal at consulting firm Potomac Partners and a former official at FHA.
"Their mission is affordable housing for people who need it," said Task. "But FHA has set the (condo) system up to fail" -- and it's doing precisely that.
• Write to Ken Harney at P.O. Box 15281, Chevy Chase, MD 20815 or via email at email@example.com.
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