The FHA Working Group (WG) was created following the June 2010 C.A.R. Business Meetings
Purpose: The FHA Working Group was charged with examining the FHA Condo Approval Guidelines released by HUD in November of 2009 and other FHA issues that may hinder homebuyers from utilizing FHA financing.
Members: John Torres, Chair LeFrancis Arnold Larry Black Winnie Davis Miguel Garcia Hana Knapp Rana Linka Tica O’Neill Jack Pharris Georgia Richardson Mike Riley
Background: In November of 2009, the U.S. Department of Housing and Urban Development released two Mortgagee Letters that drastically changed how FHA would approve condominiums for FHA lending. These changes, it was felt by many members, would severely hinder the ability of condominiums to receive FHA approval. A summary of the two Mortgagee Letters may be found at the end of this paper.
In response to these new condo approval guidelines, C.A.R.'s Housing Committee created a Working Group to look at these issues and recommend changes they believe would benefit FHA production in California.
Status/Outlook: HUD and Congress are just completing their efforts to make drastic changes to the FHA mortgage insurance program in an effort to shore up it's reserves, which at present are still below the current statutory minimum. These changes, along with the new rules that will take effect on January 1, 2011 are in line with the government’s efforts to protect the FHA from increasing losses.
Working Group Recommendations: 1. That C.A.R.'s Housing Committee review and discuss the idea of a mandatory impound of six-months of HOA fees for high loan-to-value FHA loans secured by separate interests in common interest developments (CIDs).
2. Extend the current temporary FHA Condo Approval Requirements that are set to expire at the end of the year. These are:
* Maintaining the FHA concentration level at 50% and not letting it decrease to 30% (100% in certain circumstances as defined in ML 2009-46 A). * Pre-sale requirements be maintained at 30% and not increase to 50%
In light of current economic conditions, FHA should reconsider some of its FHA approval criteria, specifically: * Raising the cap on the percentage of units one entity may own from the current 10 percent. * Raising the cap on the percentage of units that can be in arrears (more than 30 days past due) from the current 15% * Create an "excellent buyer exception." The WG believes if the homebuyer in the transaction is an excellent buyer (e.g. 760+ FICO, no foreclosure history, no bankruptcy history…), FHA should make the condo qualifying requirements less restrictive. The WG felt FHA should work to get this type of homebuyer into condominium projects to help stabilize them.
Recommendation 1: That C.A.R.'s Housing Committee review and discuss the idea of a mandatory impound of six-months of HOA fees for high loan-to-value FHA loans.
C.A.R. Policy: In 2008, C.A.R. opposed SB 1511 (Ducheny). SB 1511 would have permitted CID associations to require foreclosing lenders to pay up to six-months of past due homeowner association assessments on the property and could have caused a drastic reduction in the availability of funds for properties in CIDs. It was feared that the bill would have resulted in lenders requiring loans secured by CID properties to include impound accounts of up to six-months of assessments upon the purchase of such property to protect the lender from liability, making it more difficult for CID owners to market their homes. Due to C.A.R. and lender opposition, SB 1511 was amended to only require lenders to notify CID associations of the name and mailing address of the person who has acquired the property’s title at a foreclosure sale within 15 business days following a CID request or the date of sale. This bill took effect January 1, 2009.
Support: Home Owner Associations are facing extreme financial hardship due to the lack of HOA payments caused by high delinquency rates. Lenders are reluctant to pay HOA dues owed on properties they foreclose upon or in a short sale because they are already taking a loss. Allowing lenders to impound six-months worth of HOA fees will ensure the HOA is at least partially made whole should a unit become a short sale or foreclosure.
This will help strengthen a HOA financial position which is more necessary now that FHA has placed a greater importance on their financial well being.
Opposition: This policy would be targeted at homebuyers who could least afford to have any additional financial burden added to their closing costs or their monthly payments. These additional costs would make the marketing of condominium units much more difficult than it already is and would place CID owners at a competitive disadvantage.
Additionally, this could open the door for lenders to begin requiring other impounds to protect themselves should they need to foreclose on a property. Lenders may begin requiring impounds for utilities and other property maintenance. In contrast to the impounding of taxes and homeowners insurance which benefits the homeowner directly, this would be solely for the protection of the HOA and lenders.
Recommendation 2: Extend the current temporary FHA Condo Approval Requirements that are set to expire at the end of the year. These are: * Maintaining the FHA Concentration level at 50% (100% in certain circumstances defined in ML 2009-46 A). * Pre-sale requirements be maintained at 30%.
In light of current economic conditions, FHA should reconsider some of its FHA approval criteria for condominium units, specifically: * Raising the cap on the percentage of units one entity may own from the current 10 percent. * Raising the cap on the percentage of units that can be in arrears (more than 30 days past due) from the current 15% * Create an "excellent buyer exception." The WG believes if the homebuyer in the transaction is an excellent buyer (e.g. 760+ FICO, no foreclosure history, no bankruptcy history…), FHA should make the condo qualifying requirements less onerous. The WG felt FHA should do all it could to encourage this type of homebuyer into condominium projects to help stabilize them.
C.A.R. Policy: C.A.R. has no policy on this issue.
Support: HUD should extend FHA's condo approval requirements for another year or two because there has been little to no improvement within the condo market. Reducing the number of loans FHA can do within a condo complex will severely hinder those condo complexes’ ability to market their products.
The single-family detached housing market has seen signs of stabilization throughout California and parts of the country. A large contributing factor has been FHA’s increased role in this market and ability to provide affordable safe capital. FHA would appear to be taking an opposite tact in its ML, which will only hurt and hinder any hope of a turnaround in the condo market.
Opposition: FHA needs to ensure condos are in a strong position financially and with their occupancy in order to protect the homebuyer and the taxpayers. Now is not the time to go to FHA with requests to loosen their guidelines. Policy makers are taking actions to protect the solvency of FHA and this would hinder their efforts by opening up FHA to increased risk.
HUD Mortgagee Letters’ Summaries: On November 6, 2009, HUD issued mortgagee letters 2009-46A and 2009-46B. These letters explain the new FHA condominium approval process, for single family housing. 46B contains the new guidelines for condominium approval for FHA loans. 46A is the new temporary guideline that delays the implementation of five of 46B's provisions. The mortgagee letters were effective for all case numbers assigned on or after December 7, 2009.
Mortgagee letter 46B will create two methods of approval for condominiums: 1. HUD Review and Approval Process (HRAP)
2. Direct Endorsement Lender Review and Approval Process (DELRAP) Under DELRAP lenders have to have unconditional Direct Endorsement authority to utilize this option. These lenders may, if they wish still seek project approval under HRAP.
HUD continues to maintain a list of Approved Condominium Projects; however, the spot loan approval process has been eliminated. These are applicable to condominiums that are proposed/ under construction, existing construction or conversions.
Projects that will be ineligible are: *Condominium Hotel or “Condotels” *Timeshares or segmented ownership projects *Houseboat projects *Multi-dwelling unit condominiums [i.e. more than one dwelling per condominium unit] *All projects not deemed to be used primarily as residential
Eligibility Requirements (Please see link for mortgagee letter for the complete list) *No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. *No more than 10 percent of the units may be owned by one investor. This applies to developers/ builders that subsequently rent vacant and unsold units. *No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments. *At least 50 percent of the total units sold prior to endorsement of the mortgage. *At least 50 percent of the units must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presale requirement of 50 percent still applies). *FHA will not insure more than 30 percent of a particular condo project. For projects consisting of three or fewer units, FHA will insure one unit. *HOA budget must be reviewed in accordance with guidelines set forth in the letter.
Mortgagee letter 46A delays the implementation of four provisions until December 31, 2010, and one provision until February 1, 2010, the Spot Loan approval process. The four provisions delayed until the end of 2010 are:
*The FHA concentration will be increased from 30 percent to 50 percent (This may go up to 100 percent if the project meets certain criteria). *Vacant or tenant-occupied REOs may be excluded from the calculation of the required owner-occupancy percentage (50 percent). *Pre-sale requirements will be reduced from 50 percent to 30 percent. *The last provision deals with Florida condos.
The condo conversion requirements have changed as well, including the elimination of the one-year waiting period required for conversion.