FHA condo loans slipped under Obama. Trump’s HUD eyes a comeback

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WASHINGTON — The mortgage and real estate industries are hopeful that the Federal Housing Administration is moving more aggressively to revive its condominium loan program.

The program’s scope was reduced during the Obama administration after the FHA had imposed restrictions on condo loan approvals due to crisis-era losses. In the fall of 2016, the agency attempted to bring back some growth, reducing the owner-occupancy requirement in condo developments from 50% to 35%.

Those efforts were seen as insufficient. For example, while the National Association of Realtors welcomed the lower owner-occupancy requirements, the group raised concerns over financial stability requirements the FHA had set as a condition.

But the Department of Housing and Urban Development under President Trump is seen as more open to spurring FHA-backed condo loan growth. A recent HUD report signaled coming regulatory guidance that would ease requirements for condo buildings approved for FHA backing. The Trump administration has also shown willingness to reinstate a program to insure single-unit loan approvals in developments that are not otherwise approved for FHA financing.

"With the homeownership rate still at a 50-year low, we need to have affordably priced homes available for ownership and condominiums certainly provide that," said Lawrence Yun, NAR’s chief economist.

The impact of Obama-era restrictions on the FHA condo loan approvals has been undeniable. According to NAR, 614,000 condo sales were completed in calendar year 2016 and FHA provided financing for just 4% of those sales. Near the end of the Obama administration, the FHA decided it was time to loosen restrictions.

FHA issued a Mortgagee Letter with the reduced owner-occupancy requirement. But to be eligible, a condominium association would have to meet certain standards, such as higher reserves, a low percentage of association dues in arrears and evidence of long-term financial stability.

But HUD under Secretary Ben Carson, President Trump’s appointee, has seemed less cautious about finding ways to jumpstart the program. In June, Carson said he supports the goal of allowing "more people, including millennials, to use FHA to buy a condo."

HUD recently released its FHA fiscal year 2017 report to Congress which indicated that the FHA will significantly revise policies for condominium project approvals.

"FHA anticipates that its updated guidance in the final rule and subsequent policy implementation documents will be more flexible, less prescriptive, and more reflective of the current market than existing condominium project approval provisions," according to the Nov. 15 FHA report to Congress.

It appears the Trump administration also wants to revive FHA's "spot loan" program that was halted during the Obama administration due to foreclosures and losses.

The spot loan program allows homebuyers to purchase a unit in a condo project or building that has not been approved for FHA financing. Halting the spot loan program effectively puts 90% of condo projects out of reach for FHA homebuyers, according to some estimates.

Meanwhile, President Trump's nominee to be the new FHA commissioner, Brian Montgomery, is expected to be supportive of the FHA condo program and its spot loan program.

Montgomery served as the FHA commissioner from 2005 to 2009, and 45 housing-related groups recently signed a letter urging the full Senate to approve his confirmation.

In April 2006, Montgomery testified that "FHA should be able to serve condo buyers, just like any other homebuyers, under its standard single family program."

The National Association of Home Builders would like to see the return of the spot loan program.

"We support the return of spot or single unit approvals," NAHB vice president Chellie Hamecs said in a statement Tuesday.

"We believe the single-unit approval can play an important role in expanding the availability of condominiums to FHA home buyers by providing the opportunity for a family to purchase a unit in an unapproved condominium with an FHA-insured mortgage," NAHB said in a Nov. 28, 2016 comment letter to HUD.

"In addition, single-unit approvals could boost the owner occupancy rate in a condominium project to the level required for FHA-approval of the entire project," according to the NAHB comment letter.

The Mortgage Bankers Association also supports single-unit approvals but wants FHA to impose safeguards to minimize defaults on condo loans.

During the housing crisis, FHA suffered severe losses because many investors defaulted on their condominium loans.

"MBA believes that reinstating single-unit approvals is a step in the right direction towards increasing purchase options for first-time and low-to-moderate income borrowers, but wants FHA to develop safeguards to minimize their misuse," said Pete Mills, a senior vice president at MBA.

MBA has said that HUD should require condominium associations to report the number and percentage of units that are primary residences, secondary residences and investor units.

That would enable lenders "to more accurately track owner-occupancy rates levels and FHA will be able to better manage default risk in approved condominium projects," according to MBA’s comment letter.

But mortgage consultant Brian Chappelle noted that FHA is waiting for the Senate to confirm Montgomery before finalizing changes to the condo loan program.

"I don't think anything will be implemented until next spring," said Chappelle, who is a co-founder of Potomac Partners in Washington.

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Mortgages PMI Policymaking Ben Carson Brian D. Montgomery HUD FHA