Call it a housing policy head fake — one with potentially painful consequences for moderate-income buyers, sellers and seniors in hundreds of condominium projects around the country. If you were thinking about purchasing a condo unit with a low down payment FHA mortgage in the coming year, this could affect you.
Last week, ostensibly yielding to a congressional mandate to make consumer-friendly Federal Housing Administration mortgages more widely available in condominiums, the government announced a move to do precisely that: Starting immediately, projects with fewer than half of their units occupied by owners may be eligible for certification for FHA financing. Under “certain circumstances,” the government said, projects with as low as 35 percent owner occupancy might now be eligible.
Currently the minimum owner occupancy ratio is 50 percent — a level that critics in Congress and the real estate industry believe excludes too many first-time and minority buyers from access to FHA financing. FHA insists it needs such a threshold to avoid defaults and losses on mortgages. In July, legislation that passed Congress unanimously gave FHA 90 days to lower its owner-occupancy minimum to 35 percent or provide “justification” for keeping it higher.
That was important because historically, FHA has been the go-to option for consumers with modest resources. In some markets, FHA financing once accounted for upward of three-quarters of first-time purchases. Plus its reverse mortgage program accounts for an estimated 90-plus percent of all loans made to seniors needing to supplement their retirement incomes.
In recent years, however, the agency has severely tightened eligibility requirements for condominiums and has experienced drastic declines in the volume of condo loans as a result. Less than 10 percent of the estimated 150,000 potentially eligible condominium projects in the U.S. are now certified for FHA financing, according to the Community Associations Institute, a trade group. If a project is not certified by the FHA, no individual units within it can qualify for one of its loans.
Now for the head fake: In its announcement, FHA spelled out the conditions under which it would allow the lower owner-occupancy threshold. Condo boards of directors will have to document that their project’s financial reserves equal 20 percent or more of their budget and that no more than 10 percent of all units are in arrears on homeowner dues. Plus they must provide three years of “acceptable” financial documents for review.
How many non-certified condo projects can meet these tests? I asked FHA spokesman Brian Sullivan, who said in an email that although the agency is not certain, it believes that “many well-managed developments will indeed qualify for the lower 35 percent threshold.”
Sounds great. The million-member National Association of Realtors certainly thought so. Its president, Tom Salomone, hailed FHA’s policy switch as “a big win.”
But a closer look suggests something starkly different. FHA has created test criteria that appear virtually guaranteed to flunk most condo projects that might like to take advantage of the loosened standard. I spoke with the heads of four of the best-known consulting firms that work with condo boards nationwide to attain FHA certifications, plus a top official of the Community Associations Institute, which represents more than 30,000 homeowners associations and management companies. Everyone agreed: FHA’s policy change won’t help many projects or consumers who want to buy or sell units.
Christopher L. Gardner, managing member of California-based FHA Pros LLC, told me the 20 percent reserves requirement alone is a “deal killer.”
“I can probably count on two hands the number of associations I’ve seen that reserve 20 percent,” he said. “Homeowners (BEG ITAL)hate(END ITAL) their dues increased” and condo boards “hate to vote for increases because they want to stay on the board.” Locating projects that meet all the new criteria, he said, would be “like finding a unicorn holding a four-leaf clover.”
Rusty McInerney, president of InterIsland Mortgage Corp. of Bradenton, Florida, which has conducted more than 56,000 reviews of condo financials, said the request for three years of “acceptable” financial documents “is a Pandora’s box of ways” to reject an application.
Jon Eberhardt, president of Condo Approvals LLC, told me that “I don’t know one [project] that would fit” into FHA’s combined requirements. “Not one. It’s egregious,” he said.
Philip J. Sutcliffe, owner of Project Support Services in Philadelphia, who favors retention of the 50 percent owner-occupancy standard, said “very few, if any” projects will be able to pass the tests announced by FHA.
Bottom line: Congress may have instructed FHA to increase the number of condo units available for moderate income buyers, but apparently FHA had a different idea.