Insurance rates of all kinds follow what up to this point has been an immutable equation. Rise when risk goes up, fall when risk goes down. Somehow, the Department of Housing and Urban Development (HUD) didn’t get the memo on this and in the process, is punishing the country’s most vulnerable homebuyers and borrowers.
In November of 2019, in HUD’s annual report to Congress on the health of the FHA mortgage insurance program, it was revealed that that the FHA MMI Fund Capital Ratio skyrocketed from 2.78% to 4.84%, a staggering 63% increase from the previous year, resulting in an additional $28 billion added to the insurance fund. With the fund sitting at 4.84, the fund is 142% above the minimum capital requirement mandated by law. It is strange to see the government involved in anything that comes in under budget and ahead of projections.
Couple this good news with the great news that everyone is working with wages rising, values are still creeping up nationally, interest rates are near their historic lows, and FHA mortgage delinquencies have never been lower, and there should be a celebration by all industry stakeholders and buyers of a substantial lowering of the monthly mortgage insurance premium paid by all FHA borrowers. But all we hear is dead silence on the subject coming out of Washington, DC. If it’s not getting lowered now, when will it ever be reduced?
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On August 15th, FHA announced the return of Spot Approval, renamed Single Unit Approval, staring October 15th. Single Unit Approval is an FHA lending program that allows FHA insured mortgages in condominium associations that are not FHA approved. According to HUD, this change will result in a quadrupling of FHA insured mortgages in the 140,000 condominium associations nationwide that are not FHA approved. Not too shabby.
However, condominium associations are oftentimes diabolic and quirky entities, half the time professionally managed, the other half self-managed (or as property managers say mismanaged). Condominiums have hundreds of pages of governing and legal documents, financial documents, insurances, maps, reserves studies, board meeting and minutes, and must comply with a complete body of condominium law unique to each state.
Condominiums comprise eleven percent of the sales of residential properties in the United States, kind of the red headed stepchild of residential sales. Consequently, condominium transactions are only one out of every ten sales the average agent or lender does. This occasional experience prevents them both from ever accruing enough knowledge about condominiums and the issues that affect the sale and financing. This fact, combined with the release of Single Unit Approval, will make for certain future pain to those who do not heed the advice I’m about to give.
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In an effort to promote affordable and sustainable homeownership, especially among credit-worthy first-time buyers, the Federal Housing Administration (FHA) today published a long-awaited final regulation, and policy implementation guidance, which establish a new condominium approval process.
Designed to be flexible and responsive to market conditions, FHA’s new condo rule and the new Condominium Project Approval section of the Single Family Housing Policy Handbook, provide a comprehensive revision to FHA condominium project approval policy. In particular, the new policy will allow certain individual condominium units to be eligible for FHA mortgage insurance even if the condominium project is not FHA approved. The polices become effective October 15, 2019.
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“We are thrilled that Secretary Carson has taken this much-needed step to put the American Dream within reach for thousands of additional families,” said NAR President John Smaby, a second generation Realtor® and broker at Edina Realty in Edina, Minnesota. “It goes without saying that condominiums are often the most affordable option for first time homebuyers, small families and those in urban areas. This ruling, which culminates years of collaboration between HUD and NAR, will help reverse recent declines in condo sales and ensure the FHA is fulfilling its primary mission to the American people.”
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For mortgage originators, closing more loans is tough enough given the competition, lenders creating their own direct-to-homebuyer divisions and rising interest rates. Add to the list of troubles a curious case of inaction related to condominium financing.
Politics have always been the inescapable byproduct of democracy. Voters elect representatives, who in turn lobby for money and legislation on behalf of their constituency. Inevitable horse trading ensues with quid-pro-quo compromises serving as a politician’s currency. Although this dance is expected to happen within legislative bodies, it isn’t supposed to happen within federal agencies.
Spot approval
The U.S. Department of Housing and Urban Development (HUD) has many functions, one of which is to maintain the Federal Housing Administration (FHA) mortgage insurance fund, as well as to craft the guidelines that govern lending for FHA residential mortgages.
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A bill has been introduced in Congress which proposes that borrowers with Federal Housing Administration (FHA) loans will no longer have to pay mortgage insurance premiums for the life of the loan.
The “Making FHA More Affordable Act,” proposed by Rep. Maxine Waters (D-Calif.), would reinstate the FHA’s previous policy of only requiring premiums until the outstanding principal balance reaches 78% of the original home value, similar to the policy for private mortgage insurers under current law.
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Could condos financed with low down payment government-backed mortgages stage a surprise comeback under the Trump administration, which generally seeks to reduce federal involvement in housing? Would this be promising news for millennials and buyers with moderate incomes looking to purchase their first homes?
You bet — provided you take Housing and Urban Development secretary Ben Carson at his word. Speaking to a Realtor convention last week, Carson said he is “in lockstep” with proposals to revive the Federal Housing Administration’s condo financing program, which has been bogged down with controversial regulations and low volumes in recent years.
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When properties are eligible for FHA financing, buyers enjoy lower down payment options and easier credit requirements. CRMLS has collaborated with RatePlug and FHA Pros to add FHA Eligibility Indicators to all condos and townhomes in CRMLS Matrix for members of Associations opting to use the service through the Association Product Co-Op. These subscribers can now simply look for the “traffic light” indicators on each condo and townhome listing in the MLS to determine if the property is FHA approved (green light), conditionally approved (yellow light), or not approved (red light). The new tool also provides helpful information about how to obtain FHA eligibility for unapproved properties.
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The National Association of Realtors (NAR) continues to make the case that the Trump administration should reinstate a cut to the insurance premiums on Federal Housing Administration (FHA) loans. Its latest study suggests that cheaper FHA mortgages could be a big help to borrowers in Trump country.
The administration’s move to cancel a 25 basis point cut will affect both high-cost areas, the trade group said, but also wide-swaths of rural and small-town America where FHA use is the highest and where Donald Trump had a strong base of election support.
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Prepayment speeds have fallen 40 per cent so far in 2017 and were down 15 per cent last month, the lowest monthly rate in three years.
A first look at data from Black Knight Financial’s loan database for February also reveals that foreclosure starts were down 18 per cent month-over-month and were 31 per cent down from a year earlier. Active foreclosure inventory is 470,000, the lowest since 2007.
The top 5 states by non-current percentage were Mississippi, Louisiana, Alabama, West Virginia and New Jersey. The bottom 5 were Idaho, Montana, Minnesota, Colorado and North Dakota.
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