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Single Unit or Full FHA Approval?

When HUD releases the new Single Unit Approval program, which will allow FHA lending in communities that are not HUD approved, many associations are going to be faced with this decision: To approve or not to approve.

The real estate and mortgage industry will most certainly opt for the path of least resistance in Single Unit Approval, and understandably so. They won’t have to wait for the board to meet and vote, or involve property managers who would rather not be bothered with the work of a full HRAP submission. Why elect the manner of approval that costs more and takes longer when there is a better and quicker option? Lenders, agents, buyers, sellers, and refinancing owners will only choose full approval when it is required, such as with 2-4 unit properties or manufactured housing.

For condominium associations, the choice is not as clear. Cost is usually not a factor for the average condominium association that has ninety units or more. For a reasonable cost per unit, you can have a project consultant firm process the submission. But there are two benefits to full approval that a prudent association must consider.

First, a full project approval lets the entire real estate world know that a particular association has been vetted by HUD and appears on its approved roster. This certainty is critical to the resale market within a given community. Single Unit doesn’t approve the association, only the particular borrower’s loan in conjunction with underwriting the association and it’s governing documents and current financial condition. Consequently, it’s anyone’s guess as to whether an unapproved association is actually eligible for FHA financing under the impending Single Unit guidelines.

Furthermore, when a condominium has full approval, 50% of the units within the association may have FHA mortgages, whereas under the Single Unit Approval, FHA mortgages are expected to be capped at between ten and twenty percent. Once this threshold is reached, full approval will be a requirement.

There are of course some associations that have only full project approval as an option. Condominium associations from 2-4 units, manufactured housing condominiums, and any association that has had an adverse finding by HUD will have no other option but to go through and HRAP or DELRAP approval.

Some associations would be wise to rely on Single Unit Approvals when trying to fund an FHA mortgage within the association. Small unit associations that have few opportunities for sales or refinance, and high-end vertical condominium associations with sale prices above the maximum FHA loan limits, will find the Single Unit Approval option the most efficient and cost effective. Regardless of what approval process is chosen, one thing is certain. FHA insured lending is going to be increasing in condominiums.

The Greatest Mortgage Product EVER!

During my former fifteen-year career as a loan originator, I came across countless loan programs. In 1995, fixed rates were 11% and there were only a handful of mortgage loans offered by lenders. All of the agency loan types had limiting loan amounts, and scant portfolio products intended to help the self-employed person who was otherwise shut out of the mortgage marketplace. FICO scoring had just slithered out from under the rock from which it came, and national property values would begin their meteoric climb, and eventual crash, once again.

In the ensuing years, we saw thousands of reckless loan programs offered by lenders, backed by securitization and peddled to institutional investors by the snake oil salesmen of Wall Street. Ninja loans (no income, no job, no assets), the pay option arm (and a leg), Stated/Stated but somehow A+ rated, and zero down with zero chance the borrower was going to repay the loan, were offered by everyone. Sub-prime, loan-speak for poison, proliferated as underwriting sensibilities disappeared and Libor manipulation emerged.

The inadvertent corollary of this easy money encouraged droves of people to enter our industry, who didn’t know a thing about it or how to qualify someone. They didn’t have to. The only relevant question to the borrower was “What is your FICO score?”, because the rest of the underwriting, like income, down payment, reserves, collateral, and employment were purposefully taken out of the equation. No longer did you need to know about how to calculate income, view credit history, verify funds, read tax returns (who hasn’t been burned by 2106 expenses), MI factors and underwriting. The list goes on and on. Don’t ask, don’t tell, and for God’s sake, don’t look.

Then the day of reckoning came and went, taking with it trillions of dollars in stock market and property values, countless jobs and careers, and our once limitless confidence in our country and economy.

I illustrate this because to understand what I believe is the greatest mortgage product ever, is to understand the history of the other mortgages. The greatest mortgage ever has been around for quite some time, but historically is not frequently used. The only thing you can state when applying for this loan is your ethnicity at the bottom of the application. For many years, only 1 out of 10 lenders could originate the mortgage, given the requirements at the time. There is considerable bias against this loan product that can only be chalked up to ignorance and misinformation. The human mind, without proper information, will always fill in the blanks with negative information, every single time.

It is a fact that the best mortgage product is the FHA mortgage. And let me tell you the reason why. The FHA mortgage is one of two mortgages that are assumable by the buyer at the existing rate and term of the seller. The other assumable loan is a VA loan, but on a VA assumption, the veteran has continuing liability for the mortgage, while the FHA seller doesn’t. The seller who allows the buyer to assume his mortgage receives novation, which is the substitution of one contract for another. Assumption may not seem like much of a benefit, and that’s only because all interest rates have done during the past 20 plus years is go down, making assumption unnecessary.

The fifty-year average of the thirty-year mortgage is 8.5%. Yes, 8.5%. Rates have been going down and staying down for so long, this figure is hard to reconcile for most of you reading this. And the reason for this is the Fed, cutting rates and employing quantitative easing, purchasing mortgage backed securities and treasuries totaling almost two trillion dollars, which is keeping the cost of money artificially low. If you and I did what the Fed did, which is counterfeiting, we would be buying hot chocolate packets from Bernie Madoff.

So, I want you to envision the certain future mortgage environment where fixed rates are 8 percent, which is double where they are now. Demand would most certainly be weaker than it is now, and competition for the buyers in the marketplace would increase dramatically. Values would begin to drop precipitously, creating even less buyers. Default rates would rise, tightening credit once again, and making it harder again for buyers. Properties would sit on the market longer, which is never a good thing for values.

The one safe harbor from this maelstrom would be the almost 8 million assumable mortgages currently attached to residential properties. On the average FHA loan in this scenario, the payment on the assumption would be six hundred dollars less a month than the loan the buyer would otherwise have to obtain. There would be no Up Front Mortgage Insurance Premium (UFMIP) of 1.75% of the loan amount, because it was already charged to the current borrower. The buyer assuming the seller’s mortgage would be inheriting a loan with years shaved off of it, saving tens of thousands of dollars in interest. Similarly, MMI would automatically terminate much quicker on an assumed loan than a newly originated one, for those FHA loans where MMI isn’t lifetime. There would be no mortgage tax in the states that have one, which can amount to thousands of dollars in savings. Now comes the cherry. Once the buyer assumes the mortgage, he too can offer the assumption to a subsequent buyer when he sells.

If you still think that the FHA mortgage isn’t the greatest mortgage product even, consider this. The FHA mortgage is the only one that can, and will, enrich the borrowers bank account. Every single other one only drains it. The seller who has an FHA mortgage will have a greater pool of buyers when he sells, because more people will qualify with the lower payment his low rate loan confers. With the increased demand, price will rise. Buyers will look at the homes that have assumable FHA mortgages first before looking to ones that will require a new loan. Bidding wars for these particular properties will happen, because the present day value of large such monthly savings is substantial. Accounting for the increase in value won’t be a problem either, because an appraiser can adjust value for financing options offered by the seller.

Sometimes the federal government does get things right, and they did when they decided many moons ago to make FHA insured mortgages assumable. There are tens of millions of future homebuyers and sellers who are going to be able to take advantage of this benefit, a benefit that carries absolutely zero cost to the taxpayer. If all of this doesn’t convince you that the greatest mortgage ever is the FHA, then you haven’t been listening.

There will be a lot of Conventional crossover to FHA when Single Unit Approval Starts

HUD should implement Single Unit Approval, formerly known as “Spot Approval”, within the next couple months.  This landmark condominium program is going to be a lifesaver to those current FHA buyers who cannot find a suitable condominium to purchase, because so few of the associations in the country are FHA certified, there is no inventory.  An unintended consequence of this program will be crossover from Conventional loans into FHA Single Unit Approved loans.  Here’s why.

Single Unit Approval allows for condominium lending in almost all condominium associations, subject to a few limitations, without the community having to go through the process, cost, and delay of full project approval by HUD.

The most notable difference between an FHA and Conventional loan, is the fact that an FHA loan has a one-time, Up Front Mortgage Insurance Premium (UFMIP), which comes out to 1.75% of the loan amount and is added to the mortgage balance.   This adds about $3200 to the average loan, and is definitely the downside to using an FHA mortgage.

However, when the rest of the components of a mortgage payment are examined, FHA becomes the clear choice.  First, the monthly mortgage insurance on a Conventional loan is higher than it is on an FHA loan, and will be a lot higher if the mortgage insurance cut authorized by Obama is reinstituted.  Additionally, the rates are higher on a Conventional 97, than on an FHA mortgage, by about 35 basis points.  Many times this difference is made worse by Conventional lenders who have hits to the rate for the property being a condominium.  These not to mention the adjustments to the rate that Conventional lenders have for borrowers without the highest credit score.  Add to this the fact that the FHA mortgage is assumable, and only someone dead from the neck up wouldn’t choose an FHA.

So Conventional lenders, prepare yourselves.  In the ensuing years, you’re going to be doing a lot of comparisons of FHA loans to Conventional loans in condominiums to show your borrowers what the best choice is.  Choice is a good thing, and when buying a house, the more of it you have the better the experience and outcome you can expect.  And you can thank the Single Unit Approval and your Congress for that.

What changes to the new FHA condo rule that establishes Single Unit Approval are we sure of?

For the past several years, NAR, MBA, NRMLA, and every minority home buying organization in the country, has been hammering away at HUD to bring back the FHA condominium loan program called “Spot Approval”. Spot Approval allowed FHA mortgages, for purchase or refinance, forward or reverse, in associations that were not certified and approved by HUD. Currently, a condominium must be approved and placed on the FHA roster for FHA mortgages to fund within them.

Not having to go through the consumptive time and cost of submitting the approval to HUD, and not having to work through the HOA board and property manager, makes condominium lending easier and therefore makes FHA purchases and refinances easier. The problem was HUD didn’t want to budge from their condominium lending requirements so the above mentioned entities brought the political pressure to bear in the form of sponsorship and passage of HR 3700. HR 3700 is a housing bill that includes changes to current HUD requirements and introduces condominium lending in associations that are not approved. Renamed “Single Unit Approval”, these changes will enable lenders to fund loans in unapproved associations once again. This is a big deal. It is estimated that over 100,000 condominium mortgages will fund under this new program in the first year. They don’t pass federal laws over my favorite color.

The program will begin with the same requirements as those for traditional HRAP/DELRAP FHA approval. Now while HUD has not published the lender requirements or the final rules, we do know several small differences will exist:

  1. Only condominiums with 5+ units are eligible for this program.
  2. Manufactured housing developments will not be eligible for this program.
  3. Only units in completed developments will qualify. This also includes units in phased developments where all declared phases are 100% complete.
  4. There is an established maximum possible units within any development that will be allowed to use this program. The range is set from 0-20%. Previously, Spot Approval was limited to 10%.
  5. Condominiums with adverse conditions are not eligible for this program (HUD has not specified what these conditions would be but could included previously rejected or withdrawn association, construction defect, environmental hazard, or fraudulent submission.
  6. Condominiums that are currently FHA approved are not eligible for the Single Unit Approval program.

Currently, only 9965 condominium associations are approved in the United States and its territories. There are estimated to be 170,000 condominium associations in the US. This is why the powers that be wanted the return of Spot Approval because the number of approved condominiums have dwindled from 24,000 to just 9965 today. Consequently, the number of FHA mortgages insured in condominiums has fallen to 32,000 in 2015 from over 100,000 in 2009.

Under Spot Approval then, and Single Unit Approval now, the condominium has to be eligible. Obviously, HUD would not change guidelines to make it easier to obtain FHA mortgages when they won’t be reviewing the condominium and its governing and financial documents before hand. FHA is an insurance fund and as such, is most concerned about risk to it.

And they should. Condominium associations are diabolical, complex organisms that have to abide by both federal and state condominium law, and frequently don’t. Run by volunteer boards, they do what they want, not what they should. Much like the government, they love to kick the financial can down the street because there is no one there to prevent it.

But this program is going to be a boon to FHA lenders, borrowers, buyer and sellers. Many seniors will be able to obtain a reverse mortgage under the new guidelines because it enables them to bypass the HOA board and property manager, who are the enemies of approval. I can’t tell you the number of seniors I’ve spoken with over the years who needed a reverse for medical treatment who were unable simply because the board didn’t want any of “those people”. Those people being FHA buyers. Nauseating.

HUD has not released the final rule and lender requirements for public comment, but are expected to in the next couple of months. Apparently they are busy with the recent MI reduction and Ben Carson’s installation. Many reverse lenders already are marketing to condominium associations in anticipation of the new rule change. So lenders and agents, prepare yourselves. A new untapped market is about to emerge with 16 million more units soon to be FHA eligible.

Seniors are getting much needed relief with the introduction of Single Unit Approval

It has been a tough past seven years since the requirement that a condominium must get HUD approval was implemented.  No one was affected more so than senior citizens seeking a reverse Mortgage.  There are less than ten thousand associations in which seniors can obtain a reverse mortgage out of a whopping 170,000 HOA’s nationwide.

Single Unit Approval is going to be a huge boost to seniors seeking to obtain this very important retirement tool.  No longer will they have to wait for the board to meet (sometimes taking months) and give their blessing for FHA approval.  No longer will they have to deal with a passive or indifferent property manager who is too busy to help them.  Additionally, no longer will they have to shell out the $1,000 it costs to process and submit a HUD application!

I have spoken to hundreds of seniors over the past seven years regarding their need for both a reverse mortgage and the approval of their condominium, and their stories are heartbreaking.  Many had to sell their home and move because of their inability to make HUD approval happen, leaving them no other option to reasonably tap into their equity to obtain necessary cash flow.  With needs like hip replacements, cancer treatment, and money for their grandkids’ college fund, these seniors battled against laziness, various biases, and ineptitude, while also losing valuable time.  When they sold those properties, and purchased again with a reverse mortgage, 10% of their hard earned equity was wiped out.

Thirty-one percent of the persons living in a condominium are 62 or older, which indicates that a high concentration of seniors will benefit from Single Unit Approval.  This is why the reverse mortgage industry was behind HR 3700, the federal law that mandates Single Unit Approval.

HUD has done a nice job balancing their need to protect the insurance fund with the needs of seniors to estate plan with the new condo rule.  It also just might lead condominium associations to conduct themselves with more fiscal and operational savvy, so as to enable more seniors to avail themselves of one of the greatest retirement tools ever.

FHA condo buyers now are really going to get the chance to buy their dream home.

Imagine as a single family home purchaser, your agent says that they are going to show you homes in your price range this coming weekend.  You get all excited, go on Zillow, preview the dozens of places sure to be in your price range, imagining the joy of picking out new furniture and moving in.

The weekend arrives as does your agent, and off you go, looking at a few places, but you’re not really excited about any.  But you know there are dozens more to look at so you don’t despair.  That is until your agent drives you back home instead of to the next townhouse you know is on the market.  Welcome to the world of the FHA condo buyer.

Since only 6% of condominium associations are FHA approved, the FHA condo buyer can only look at and buy in 6% of the units listed for sale.  In many areas, the percentage is even smaller.
This sobering fact is why there is a silent wave of FHA condo buyers just waiting for the chance to look at all the properties on the market before making a decision on which to buy.

With the implementation of Single Unit Approval, FHA condo buyers will no longer be restricted to purchasing units in associations that are FHA approved. This landmark federal legislation opens up lending in communities that no longer have to go through the time-consuming and laborious process that is FHA approval, in most cases.

Whether the industry knows it or not, this new program is going to swell the number of purchases by buyers using FHA-insured mortgages by record numbers.  Every seller of a condominium should rejoice at the added value this demand increase will confer.  Real estate agents should be popping the champagne to celebrate that their FHA condo buyer actually is going to have, you know, many more choices!

Single Unit Approval might not seem like a small adjustment to current guidelines, but its effects are sure to be anything but small, on the number of FHA mortgages insured for purchase inside condominium associations.

Did HUD bail out HOA’s by bringing back Single Unit Approval?

I’ve looked at and spoken with over ten thousand condominium associations the last eight years regarding FHA approval.  In 2010, when HUD got rid of spot approval(aka Single Unit Approval) and made Approval a requirement, me and the few competitors I have collectively thought  that good times had arrived.  We certainly figured that many associations would seek and get the approval and our small industry was about to get big.

This is not what happened.  Even though approval was now a requirement, less condo associations sought the approval.   This would defy logic:  The government requires it and less of it happens?  Do less of you wear your seat belt now that it is a requirement?

Over the years, I heard the following reasons out of the mouths of board members explaining why they did not want FHA approval:

  • We don’t want any of those FHA people=illegal and violates dozens of housing laws.
  • If we get FHA approval, we will have section 8=completely untrue.
  • FHA borrowers are more likely to not pay their assessment=absurd, baseless and violates many housing laws.
  • FHA approval brings down property values=yeah, more demand lowers the value of something.
  • FHA buyers only put 3% down=the minimum down is 3.5% but the national down payment is 6%.(sidebar:  Fannie and Freddie has 3% down payment condo loans but you never hear about HOA’s wanting to keep them out).

I’ve heard these and more baseless statements made unfortunately by board members, who were tasked with making the most important decisions about the association. It was the falling number of approved condos that promoted the powers that be to pass the law to bring back the program that eliminated the necessity of approval. It is a certainty that Single Unit Approval will result in a large increase in FHA lending in condominium.

I have been asked innumerable times for my opinion as to why so few HOA’s seek the approval.  The reason so few condos sought the approval is that by and large, since 2010, the condominium market nationwide has been robust.  There were enough cash and conventional buyers that no one had to pay attention to the 30% demand that are FHA buyers.  Now this is changing…

The Case Schiller affordability index is at its historic low, high end markets such as Aspen, Manhattan, South Beach Florida are seeing sales crater 50%, rates are rising and are expected to keep rising, Gary Keller of Keller Williams stated he sees a market correction in 2017, and there are more open house signs lining street corners than at any time in recent memory.

This market and paradigm shift is going to cause sellers have to now value and market to ALL buyers if they don’t want the property to sit.  They are going to finally realize this economic law:

If demand goes up, and supply stays the same, PRICE rises.

So now, in a slowing market, all buyers matter.  And now with the implementation of Single Unit Approval, the clueless and discriminating board members will no longer be able to harm the values of their neighbors by refusing and frustrating the process of approval previously required.  Those owners and FHA buyers own HUD and their elected officials and big wet kiss!

The Congressional Mandate of the return of Spot Approval is a good thing.

The return of Spot Approval is a very good development for condominium associations and the buyers, sellers, and refinancing owners who are affected. Spot Approval was eliminated on February 1, 2010, in favor of the requirement that an association obtain FHA approval from HUD, before an FHA insured mortgage could fund within the project. The powers that be like National Association of Realtors, the Mortgage Banking Association, the Reverse Mortgage industry, and every minority home buying organization, have been leaning on HUD for the last couple of years to bring the Spot Approval program back because its elimination has stifled condominium lending. Getting the condominium approved though HUD is a costly, time consuming process that is Byzantine to most professionals, and since HUD wasn’t budging, HR 3700 was proposed to implement that which HUD was unwilling to adopt.

It was risk management that prompted HUD to eliminate Spot Approval, because FHA market share and attendant risk was increasing. When FHA market share was only 2% prior to 2007, the need to worry about the risks posed by lending in unstable associations was small. HUD decided it would be a good idea to see the association, its governing documents and financials, before allowing anyone to use an FHA loan. This prudent decision coupled with others, has allowed for FHA to reach its 2% capital reserve requirement for loan losses, a mandate that is law. It had fallen below this threshold due to loan losses and insufficient premiums since the mortgage meltdown. FHA’s better financial health prompted them to recently reduce the monthly mortgage insurance paid by the borrower.

Now that the picture for the insurance fund is rosier, HUD can open the insurance purse strings to help seniors seeking a reverse mortgage, or the 80% of minorities that use an FHA loan when obtaining a mortgage. Last year, HUD only insured 26,000 mortgages in the less than 10,000 associations that are currently approved. This amounts to a little more than 2% of the 1.2 million residential mortgages they insured in 2015. With less than 10,000 associations approved, buyers have very few condominium choices. This fact is causing sellers values to drop, because it is economic law that if demand drops (no FHA buyers), and supply stays the same (listed property), then price falls. Economic law!
This loosening of regulations isn’t without some potential trap doors. HUD will need to be vigilant over the lenders funding these mortgages, to ensure they underwrite them consistent with long established HUD rules. In addition, they need to find quality control technologies that can independently verify the information that is being supplied to them. There is too much temptation for fraud to turn a blind eye to it. This is what got the insurance fund in trouble in the first place. Penalties and systems in place to protect the insurance fund and keep these very valuable government insurance programs alive.

Why “The First Right of Refusal” is a Terrible Clause to Put in Condominium Documents.

Many associations throughout the United States have in their condominium by laws a right of first refusal. A right of first refusal requires the seller of a unit within a condominium association to offer the association the first right to purchase the unit under the same terms and price offered by a buyer.

The right of first refusal has a long history rooted in discriminatory behavior. The right of first refusal when first implemented, made it possible for an association to prevent a particular buyer from purchasing in the association by exercising the right to purchase it first.

It is rare that you will find an associations’ governing documents that does not have a first right of refusal. Even more rare is finding a case where an association actually exercised the right. Most condominium associations have their financial hands full collecting enough money to cover the deferred maintenance and continuing operations of the associations. Moreover, the real estate and mortgage meltdown led many associations to write off significant unpaid monthly dues, further exacerbating their already frail finances. The reality is that associations just are not in the financial position to exercise the first right, which begs the question. Why haven’t they stricken the language from the documents?

The cost and headache to undertake an amendment is the primary reason. In many cases, a vote of 75% of the owners is required to amend the by laws, with no guarantee how the vote will come out. In addition, most board members have no idea as to what effect on financing the existence of the right has. The worst consequence of having the first right in the condominium documents is that it prevents VA approval. This translates into Veterans being unable to purchase in the vast majority of condominiums in the United States. Making matters worse is that the vast majority of condominiums in the country are not approved, further whittling down the housing choices that we should be expanding, not limiting.

A good start would be legislation that outlaws these clauses that are almost never exercised. This country doesn’t do a lot for those people who have put their lives on the line for this country. The least we can do is to is make it easier for them to have a nice place to live.

What Does the Passage of AB596 mean for condominium associations?

A couple of months ago, Governor Brown signed into law AB596, which requires common interest developments to annually report whether the association is FHA or VA approved. What started out as a bill to REQUIRE FHA and VA approval was passed in its final form to only require annual reporting by condominium associations. This was due to the pushback from associations, management companies, and their attorneys that were concerned with a bill that would have required approval.

Given that the teeth were taken out of this piece of legislation, I am not quite sure what the passage of this bill really means. It’s shocking to this commentator that there is an association that exists that hasn’t taken the time to get both of these approvals. Between FHA and VA market shares, failure to have the certification of both these agencies results in a loss of 25-30% of the purchase demand. Eliminating this amount of demand when selling a unit will decrease not only its value, but the value of ALL units in the association. In addition, a lack of FHA approval prevents a senior resident from refinancing to a reverse mortgage. Annual reporting without review or justification for not obtaining these agency approvals is really just a paper push at the end of the day. It will most certainly require legislation or a court decision that makes these approvals mandatory, because the status quo isn’t adding any more housing options for borrowers using these two types of mortgages.