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.