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:
- Only condominiums with 5+ units are eligible for this program.
- Manufactured housing developments will not be eligible for this program.
- Only units in completed developments will qualify. This also includes units in phased developments where all declared phases are 100% complete.
- 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%.
- 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for this program (HUD has not specified what these conditions would be but could included previously rejected or withdrawn association, construction defect, environmental hazard, or fraudulent submission.
- 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.