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.

Misleading FHA Certification Warning

In an article titled “FHA Certification Warning” posted in the November 3rd, 2013 newsletter on the blog site, the author had this to say about FHA certification.

“There has been a debate for years about the wisdom of certifying a development for FHA loan guarantees. Following are the pros and cons of certification:

Argument For Certification. FHA insured loans have become a significant percentage of all condo loans in California. In 2007, they accounted for only 3% of the market. By 2012 they accounted for more than 50% of all new home loans and 80% of first time home buyers. Moreover, loan limits now go to $729,750. As a result, failing to certify would eliminate a significant percentage of potential buyers.

Argument Against Certification. The cost to become FHA compliant may be significant or unachievable. In addition, FHA buyers may be financially unstable. An FHA-insured buyer has a low down payment (3.5% of the purchase price vs. 20% for conventional loans), low closing costs, and easy credit qualifications, which is why the loan must be insured by the federal government. Because FHA buyers are financially weaker, they are less able to handle special assessments and dues increases. As a result, they are more likely to become delinquent and slide into foreclosure. This would have a negative affect on property values and the association’s budget.

Lawsuit Over Refusal. Last week David Byrne of Herrick Feinstein LLP reported that an Ohio condominium association was sued when it chose not to seek FHA recertification. A single mother with a child wanted to purchase a unit using FHA insured financing. When the board declined her request for recertification, she filed a complaint with the Ohio Civil Rights Commission. The Commission, in turn, sued the association. The case is pending.

RECOMMENDATION: Although no decision has been handed down in the case, the fact that the Civil Rights Commission sued the association is troubling. As a defensive measure, boards should review their status as an FHA certified development. If their condominium development is not certified, boards should weigh the pros and cons and make a decision whether certification is beneficial or even achievable. The matter should be put on the board’s meeting agenda and discussed in open session. Any decision not to seek certification must be based on non-discriminatory reasons. The board’s decision and the rationale behind it should then be recorded in the meeting minutes.

Thank you to James C. Harkins, IV, Esq. of Cane, Walker & Harkins LLP for bringing this case to my attention.”

“Reprinted from by Adams Kessler PLC

Unbelievable that a very prominent California HOA law firm would publish this but they did. No wonder there is so much misinformation about FHA approval. Many of these statements violate State and Federal law, as they evidence a discrimination against those attempting to use an FHA loan to purchase in an association. In addition, they are completely unsupported by any……I don’t know……FACTS!

Stating that FHA buyers may be financially unstable is a ludicrous statement. Their income and credit scores are vetted in exactly the same manner that Conventional loans are. As for the percentage of down payment, the FHA MINIMUM is 3.5%, but many if not most put more of a down payment than the required minimum. Further, Conventional loans DO NOT require 20% as this newsletter indicates. Most Conventional loans in condominium associations are obtainable with 10% down payments. Moreover, the statement that it is the weaker FHA borrower that requires the government to insure them. Again, complete hogwash. The Federal Government backstops Ninety five percent of the mortgages being issued now, since Fannie Mae and Freddie Mac have been taken over. In case you’re wondering how FHA loans have performed against Conventional loans, you need only look below.

Government Bailout Scoreboard (in $)

Fannie Mae & Freddie Mac (Conventional loans) – $180 Billion
FHA – $0

Finally, the statement that FHA buyers are more likely to become delinquent and slide into foreclosure really is unconscionable and flat wrong. There is little difference in the delinquency rates between the two loan options. And to draw the conclusion that having FHA buyers will lead to a negative affect on property values and the associations’ budget is a non sequitur. You know what WILL have a negative affect on property values and the associations’ budget? Less demand, which is accomplished by NOT having FHA approval, as FHA loans are utilized by 1 out of 4 buyers.

It is truly scary that associations are paying legal fees for this type of advise and counsel. Not only is it wrong, but discriminatory and subjects the association to possible litigation. And until this approval becomes required, associations will continue to be misled and misinformed about the FACTS of FHA approval.

How do short terms rentals allowed by associations affect their FHA approval?

There is a lot of confusion in the marketplace as to what the rules are as it relates to short term rentals for FHA approval. The bottom line is that if an association does in fact allow short-term rentals (minimum periods of less than thirty days), they are ineligible for FHA certification. These types of associations are referred to as “condotels”, and as such, are commercial enterprises and not considered residential in nature. HUD insures residential mortgages for owner occupants. It is very common for resort type areas (Florida, Hawaii) to allow short terms rentals because of the demand for vacation accommodations, and is one of the main reasons why there are so few FHA approved associations in these areas.

Where the waters get murky, is where the governing documents of the association are in conflict with the actual practice of the association. The developers of condominium associations included when they formed the associations, a myriad of differing language that caused HUD to issues the following waivers.

I. When the declaration (CC&R’s) states no minimum lease term, and neither the declaration or Rules and Regulations prohibit hotel leasing, then the board may prepare a letter on their letterhead, signed by the board president, attesting to the fact that there are no leases for a term of less than 30 days and that there is no hotel/transient leasing.

II. When the declaration (CC&R’s) states no minimum lease term and does not prohibit hotel leasing AND the Rules and Regulations DO state a minimum terms which is less than 30 days, the board must revise the rules and regulations so that the minimum lease term is 30 days or greater.
III. When the declaration (CC&R’s) states that any lease term of less than 30 days is permitted, the association must draft, approve, and record an amendment to the declaration (CC&R’s) which changes the lease term to 30 days or greater.

There is also a waiver in regards to lender or developer exceptions to leasing terms.

IV. When the declaration (CC&R’s) state that a lender or developer have any exception to the lease term, the board may prepare a letter on their letterhead, signed by the board president, attesting to the fact that there are no leases for a term of less than 30 days and that there is no hotel/transient leasing.

Associations must weigh the benefit of access to thirty percent of the current buyers by FHA certification, with the benefit to owners of the ability to rent their units for profit when the owners aren’t occupying them. As far as HUD certification is involved, no short term renting is allowed under any circumstances.

Here’s another example of how condo board of directors are failing their association.

Another completely misguided and ill informed board making erroneous decisions that will have a long lasting, negative impact on the association and its property values.
Here’s a letter we received from a condo association board member stating the reason why they’ve declined to pursue FHA Approval for their condo.

“After thoughtful consideration, the Board has decided against registering the D***** Plaza Association with the Federal Housing Administration. While it is understandable that some of the programs offered by the FHA could be beneficial, they do not outweigh the fees or restrictions that the FHA requires, and can impose.

The following list includes some of the items that were considered when making the decision.

Recent changes to FHA guidelines and certifications.
New requirements for reserve studies for new conversions.
New and risky certification for special assessments.
New delinquency rules.
New and very risky project certification to be signed by manager or association.
Effective date for some changes is immediate.
Expanded financial records now required.
Fidelity insurance changes required.
FHA rejection for association loans and special assessments.

Thank you for bringing this matter to our attention and for the opportunity to research it more fully.”

  1. There are no real changes to FHA guidelines and certifications. Ninety percent of the qualifying criteria are the same as they have been for decades.
  2. There are no new requirements for reserve studies for new conversions.
  3. This conclusion is just plain bizarre. Special assessments are very frowned upon by HUD and their existence makes an HOA ineligible in most situations. There is no certification, and the “risky” comment is dumbfounding.
  4. There are also no “new” delinquency rules. Delinquencies can be no more than 15% of the total units, and it has been this way for decades.
  5. New and “risky” project certification to be signed by manager or association. This board member is referring to the Appendix A, which is signed under penalty of a million dollar fine and thirty years in prison. It states that the information is true and correct. However, this penalty only covers “fraud”, not innocent mistakes. The association only has to worry about this certification is if they are committing fraud. Additionally, if the HOA retains a consultant firm to process the application, the sponsor firm signs the Appendix A, releasing the association for liability under this document.
  6. Effective date for some changes is immediate? What does this even mean? It is complete drivel.
  7. Expanded financials now required. No they’re not. The required financials are the same that have always been required.
  8. Fidelity bond insurance must equal the sum of three months assessment, plus whatever is held in reserve. This association obviously doesn’t have enough coverage, so a dishonest board member or property manager could conceivably empty the association’s bank account, and there wouldn’t be enough insurance to cover the losses, which would need to be made up by the owners.
  9. FHA will reject an association that has special loans and assessment, because it is an indication of a poorly run and managed association. The monthly HOA assessment should cover ALL of the costs of the association. Special assessments and loans are needed by associations that refuse to increase the monthly HOA dues, and therefore have to rely on one time special assessment, or loans, to cover the cost of maintenance of the property.

I don’t think it is difficult to sense my frustrations with these boards of directors. They’re misguided, ill informed, and have no clue as to the real issues involved with FHA approval. I have to deal with them on a daily basis, no easy task. They’re dogmatic and unwilling to listen to reason. And what is really a chunk of irony is it is these same board members who sat idly by and watched countless real estate speculators and buyers purchase within their association with zero down payment and no income verification! God forbid buyers now, using an FHA loan, are fully vetted from an income, credit, and down payment standpoint. It is going to be interesting to see what types of litigation come out of the actions of these boards, because as more homeowners become better informed, they are going to look to hold these boards accountable for the erroneous decisions they make.

Why is it that only 9 percent of associations in the country are FHA approved?

I was recently sent this from an owner in an association whose board considered the subject of FHA approval, its pros and cons, and published this to its members as their findings and voted unanimously not to pursue FHA approval. It would be laughable if it weren’t so common.

“FHA Building Approval”

The Board of Directors discussed at length the pro’s and cons of having the Association FHA approved. For the following reasons, it was their unanimous decision not to proceed with obtaining approval and this decision is within the discretion of the Board under the “Business Judgement Rule”:

  • The amount of fidelity Bond coverage will need to be increased by 250% to meet FHA requirements, at an additional unbudgeted cost to the Association.
  • The Capital Reserve Fund will need to be updated annually at a cost that is not in the Operating budget. Therefore, there will need to be a substantial increase in the maintenance fees in order to carry the additional funds that will be required to fund the Reserve Account per the updated study.
  • With FHA mortgages, unit owners may finance up to 97% of the value of their home. Therefore, there is minimal equity in the home and over time, can be over leveraged especially if current market values continue to decrease, as what has already happened with the economy.
  • The Association’s balance sheets and collections will be impaired by permitting purchasers to acquire units with up to 97% financing. More times than not, they will not remit their maintenance fees in a timely fashion.
  • No more than 30% of the units in the community can be subject to FHA mortgages.
  • Therefore, all of the aforementioned conditions would be put in place for the benefit of 54 units at the expense of 180 unit owners, knowing that 126 owners will not benefit from being FHA approved.”

Conclusion number one is accurate, in that the fidelity bond coverage would need to be increased to cover the sum of three months of the standard assessment, plus whatever is held in reserve. Fidelity bond coverage is extremely inexpensive to increase, something this particular board didn’t bother to investigate.

Conclusion number two is completely erroneous. No reserve study is necessary, provided that the association budgets 10% of the standard assessment to reserves.

Conclusion number three defies logic. The statement, “there is minimal equity in the home and over time, can be leveraged especially if current market values continue to decrease”, is nonsensical. The exact OPPOSITE is true, which is to say that the more values drop, the less leverage there is since the equity is declining, not appreciating. No one putting 3.5% down payment is going to be able to refinance any money out of the property in the foreseeable future, given current market conditions.

Conclusion number four not only is ridiculous; the statements contained therein likely violate a number of Federal and State housing discrimination statutes. The judgment that FHA borrowers, more times than not, will not remit their maintenance fee in a timely fashion is arbitrary, capricious, and completely unsupported by the facts, and evidences this boards obvious bias towards government insured borrowers.

Conclusion number five is also incorrect. Fifty percent of the units within an association are eligible for FHA financing, not thirty percent. This is called FHA concentration, and can be as high as 100%, on a case-by-case basis as decided by HUD.

As one can see, boards across the country are breaching their fiduciary duty owed to the association, when considering this most important issue of FHA approval and coming to conclusions that are factually incorrect and discriminatory in nature. I cannot understand how, in this market, an association can eliminate forty percent of the current buyers by voting down FHA approval. Unfortunately, this is a problem that plagues a large percentage of the associations across the country and will not change until these boards educate themselves and gather the facts about FHA approval and its market share.