Is low-down payment financing for condos coming back?

New FHA proposals may not be as favorable to sellers, buyers as they appear at first glance

For many condominium buyers and sellers across the country, the Obama administration delivered what seemed like encouraging news last week: The Federal Housing Administration, once the primary source of mortgage financing for moderate-income and first-time condo buyers, is coming back, big time.

But the real story was more complex.

Under new reform proposals, FHA plans to loosen some of its controversial and strict eligibility rules that have caused condo associations nationwide to abandon the program.

It also wants to revive so-called “spot loans” — mortgages for individual units in condo buildings that haven’t received blanket certifications from the agency. That change alone could open up low-down-payment financing for millennials, minorities and others in many of the estimated 150,000-plus condo projects in the United States. The Community Associations Institute estimates that just 14,000 condo projects nationwide — less than 10 percent of the total — are now certified for FHA-insured mortgages.

The proposals would also throw a lifeline to senior owners of condo units who need a reverse mortgage to supplement their retirement income. Since FHA’s reverse mortgage program accounts for an estimated 90 percent-plus of all reverse mortgages, the recent inability of seniors living in uncertified condo buildings to obtain reverse mortgages has effectively denied them funds they’d otherwise be able to access.

To real estate professionals such as Norva Madden, an agent with Long & Foster Real Estate in the Maryland suburbs of Washington, D.C., reopening FHA financing to more condo projects — after nearly eight years of rules that scared them away — can’t come soon enough. She’s had multiple, well-qualified buyers eager to buy condo units in the affordable $155,000-$160,000 range walk out the door when they discovered they couldn’t use FHA financing because the building where they hoped to live had left the federal program. Rather than selling quickly for close to list prices, units in non-certified buildings often languish on the market for 90 to 180 days, she said, and then sell below the asking price. In one recent case, an elderly owner was forced to sell her two-bedroom condo to a low-ball bidder for $13,000 less than she could have otherwise obtained from FHA-qualified buyers.

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Lack of FHA certification “puts a hardship on the sellers” in middle-income buildings, Madden told me — it costs them real money.

But the new proposals may not be as favorable to sellers and buyers as they appear at first glance. A key test of eligibility for FHA is a building’s percentage of owner occupants versus renters. In recent years, FHA has required that at least 50 percent of a building be owner-occupied to qualify. Housing industry critics have said that’s too high and excludes too many financially sound, well-managed projects. This past summer, Congress passed a bill by unanimous votes in both chambers requiring FHA to drop the threshold to 35 percent within 90 days or provide justification for anything higher.

Here’s the sticky wicket: In its proposal Sept. 27, the agency didn’t address that mandate but offered a starkly different approach. It plans to select limits from an owner-occupancy range between 25 percent and 75 percent, and vary them whenever it chooses by issuing a “notice.” FHA said the current 50 percent limit “has worked” but did not explain what that meant. The congressional deadline for compliance with the 35 percent requirement is near the end of October. Whether the agency intends to stick with its current rule or accept Congress’s more lenient standard is unclear. But under FHA’s proposal, the mandatory owner occupancy percentage could be raised to more than double what Congress directed or it could be 10 percentage points less.

One long-time expert in the field, Chris Gardner, president of FHA Pros LLC, a Northridge, California-based national consulting firm that helps condo associations obtain certifications from FHA, had mixed feelings about what the agency is up to.

If it follows through on its spot loan proposal, he says, it will be a “landmark” decision because it “will make so many more purchases happen” in projects currently lacking certification.

But Gardner is concerned about FHA’s proposed range of 25 percent to 75 percent on owner occupancy. It might be “intended to give [FHA] flexibility without having to involve Congress,” he said. But it might also be “an attempt to bypass Congress.”

Bottom line: Don’t bank on any immediate changes until FHA announces final rules. If the agency is playing a runaround game, it’s up against the wrong opponent: a Congress that is determined to revive the affordable condo market.