There has been a lot of chatter in recent weeks on Capitol Hill from lawmakers and housing groups pressing the Federal Housing Administration (FHA) to ease its regulations on condominium financing. But while easier FHA condo rules would improve seniors’ access to FHA-insured Home Equity Conversion Mortgages (HECMs), reverse mortgage industry members are skeptical whether meaningful change will actually come.
At the foundation of FHA reform is legislation (H.R. 3700) introduced by U.S. Representative Blaine Luetkemeyer (R-MO) early last month. The legislation, known as the Housing Opportunity Through Modernization Act of 2015, seeks to amend several sections of the National Housing Act that would streamline FHA condo certification requirements to make mortgage financing less burdensome, and in turn, would increase FHA financing access for more potential homeowners.
Because the HECM program is backed by the FHA, this would mean more seniors who are living in condos will have greater access to these federally-insured reverse mortgages than they currently do today, where an entire condominium project needs to gain FHA approval before a single tenant can obtain a HECM.
“I’d be surprised if FHA went back to the old spot approval days,” said Mike Jacobus, client relations manager at FHA Condo Consulting, LLC, a Seattle-based company that works with condo associations seeking FHA certification. The company also works with many reverse mortgage lenders whose clients are seeking HECMs in their condominiums.
Prior to the Great Recession, FHA conducted “spot approvals,” which granted agency certification on a unit-by-unit basis, rather than subjecting the entire condominium to undergo FHA approval. Under this old way, an individual senior could obtain a HECM while continuing to live in their condo.
“That was more of an expedited process unlike what you have now, where the entire development has to be pre-approved with FHA before any individual homeowner could do an FHA loan,” Jacobus said.
But since spot approvals have been eliminated, the process for helping seniors in condos get a reverse mortgage has created a slew of challenges and procedural headaches.
“One of the frustrating issues for seniors is their association board members are not willing to go through the certification process, even if the homeowner is willing to pay for our [FHA Condo Consulting’s] services to get the HECM loan done to where it’s not costing the condo association money,” Jacobus said. “That’s really a bind for seniors.”
Another obstacle barring greater acceptance of FHA approval for HECMs among condo associations is a challenge the reverse mortgage industry knows all too well: overcoming misconceptions associated with reverse mortgages.
In one particular instance, FHA Condo Consulting was working with a condominium project on the Waterfront in Boston, a development where the units fetched at least $1 million a piece.
“The board didn’t understand that even if a unit is a million dollars, they could still do a reverse mortgage at the FHA maximum limit,” Jacobus said. “They thought it would shed bad light on the condo itself.”
A common misunderstanding of reverse mortgages among condo boards, as well as the management companies operating the condo building, is confusing FHA certification with Section 8 low-income subsidized housing, says George Downey, founder of Harbor Mortgage Solutions, a reverse mortgage broker based in Braintree, Mass.
“The overall problem is a prevailing ignorance about what the reverse mortgage is all about, and what the FHA approval really means,” Downey said. “People confuse it with meaning the same thing as Section 8 subsidized housing. So it’s very hard even if you get the chance to meet with people [condo boards and management companies] and have a dialogue.”
Downey estimates that as Harbor Mortgage Solutions becomes involved in a new project when helping a condo-living senior obtain a HECM, anywhere from two-thirds to three-fourths of the condominium associations refuse to talk seriously about or investigate FHA certification for reverse mortgages.
This happened in two recent experiences, with two different seniors who wanted HECMs in their non-FA approved condo, Downey noted. After multiple meetings with condo board trustees, he noted the seniors were unable to get the trustees to investigate the FHA certification process.
“It’s a shame because in one of these cases, I know the senior is going to have to sell their unit to achieve the financial security they need,” Downey said.
Condos are often the most affordable homeownership option for first-time buyers, small families, single people, urban residents and older Americans, said National Association of Realtors (NAR) President Chris Polychron, who offered support for Luetkemeyer’s legislation last month, testifying before a U.S. House Financial Services Subcommittee on Housing and Insurance.
“Unfortunately, current FHA regulations prevent buyers from purchasing condominiums, harm homeowners who need to sell their condominiums, and limit the ability of condominium projects to attract resident buyers,” Polychron said in his prepared testimony. “H.R. 3700 includes changes to FHA policies that will give current owners and potential buyers of condos access to more flexible and affordable financing and a wider choice of approved condo developments.”
Despite outcry from lawmakers and housing industry groups, the Department of Housing and Urban Development (HUD) has remained vague in its intentions to revise current FHA policies, saying it is working on revisions to the agency’s condo rules and that it “anticipates a rulemaking process,” according to comments made by HUD Secretary Julian Castro during a recent housing event.
Meanwhile, HUD nears the release of its annual Actuarial Report showing the financial footing of FHA’s Mutual Mortgage Insurance Fund for Fiscal Year 2015, which could spell out where the agency needs to make pertinent program changes.
But while time will tell whether or not FHA updates its condo policies, Jacobus says that he has been seeing more awareness and calls in the last six months coming from reverse mortgage lenders working with prospective HECM borrowers currently living in condos.
“That’s an indicator that this particular market is moving somewhere, but you still run into the fact that the majority of condos in the U.S. aren’t FHA approved,” he said.
Written by Jason Oliva