Easier FHA Condo Rules Would Improve Seniors’ Reverse Mortgage Access

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.

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“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

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  • What is not being discussed is why it is important for the entire project to be approved. Condo collateral includes common areas that must be maintained and that have frequent suits. The value of condo units shrink if HOAs do not have the adequate financial reserves needed to pay lawsuit losses and maintain common areas. No lender or lender insurer wants collateral that has significant risk of loss from an irresponsible HOA or HOA membership.

    Condo spot approvals are a dangerous step for the HECM program. With a loss of 7.7 billion in fiscal 2014 (we are waiting for the outcome for fiscal 2015), the condition of the HECM portion of the MMI Fund is at best precarious. Yes, there are irresponsible attacks on the estimates of the actuaries but not even Congressional Democrats have estimates which can be said to be better.

    So adding condos where the entire project is not approved is simply adding an additional source of contingent losses to the HECM portion of the MMI Fund. Doing that would be highly irresponsible.

    • They lost 7.7 Billion because the values of US homes lost billions of equity. But lets be honest here, HUD and The FHA are not good lenders and they have never been good at lending. That is just a fact. The FHA was No 1 in foreclosure’s for 25 straight years prior to the housing crisis. They send underwriters hand books on how to underwrite loans, when if they simply reviewed files like community banks did, a spot condo approval would be fine as would be the entire portfolio of FHA loans. HECM Endorsements are down about 21% for HECM’s largely because you can’t roll out a new “credit risk” underwriting model and then have people “more qualified” not receive better loan terms. Certainly you can deny some, as you can limit the loan to value and place escrow demands on the lessor qualified..but if you want to build a portfolio of “good loans”, you have to entice good borrower’s to be a part of the portfolio. It’s that simple. This goes hand in hand with the spot condo’s and the fact that you can offer this very well but you have to be selective. At 60% loan to value if an FHA underwriter can’t make a call on a spot check condo that presents a good loan, they probably don’t belong doing it.

      • JD,

        I do not believe you understand why the fiscal year 2014 loss occurred. It has more to do with interest rates used in computing discounted cash flows than loss in equity in the collateral. Yet last year was a good year for the growth in value (not necessarily equity) for the real estate industry generally.

        Since when is either HUD or FHA a HECM originator? FHA is an insurer of HECM lenders/originators. So your facts are far more than suspect.

        Financial assessment does not look at the financial condition of the HOA at all. So why are you ranting about financial assessment? On more than occasion I have questioned NOT the need for financial assessment but rather its draconian nature but again what does that have to do with analyzing the fiscal condition of the HOA?

        If you think the cushion that HUD has established in its most recent Principal Limit Factors is sufficient to cover value losses stemming from HOA financial issues, you lack a strong understanding of why the HECM portion of the MMI Fund is underwater.

        As to your next comment, you still seem lost in the idea that HUD is a lender. On the forward mortgage side, HUD is there to insure loans on those who might not otherwise qualify. So are there more problems with HUD insured loans? You bet but the losses are not supposed to exceed MIP which is happening on the HECM side of the MMI Fund. The forward mortgage side of the MMI Fund is likely to be positive once again this year. HECMs are THE problem mortgage in the MMI Fund.

        To understand the problems, dig into the Actuarial Reports for the HECM portion of the MMI Fund for fiscal years 2010 through 2014 (the report for fiscal 2015 is due to be posted by HUD shortly).

    • Performance of US Mortgage loans outstanding at the end of the second quarter of 2014…..On a seasonally adjusted basis, the overall delinquency rate decreased seven basis points for all loan types to 6.04%. The seasonally adjusted delinquency rate decreased nine basis points to
      3.20% for prime fixed loans and increased 20 basis points to 5.28% for
      prime ARM loans. The FHA delinquency rate fell just 15 basis points and stood at 9.67%. I don’t agree with Ted Cruz on a lot of things but getting rid of HUD might be a start. You can’t explain away 3 times the number of foreclosures, year after year and then go to congress and say “oops, we lost 7.7 Billion in 2014”.

  • Sorry for the long reply, but this is something I’m passionate about. I agree with you Cynic that spot approvals carry a lot of risk to the FHA insurance fund. There has to be a way to allow them and continue to be diligent about what kind of condo complexes FHA is willing to insure in. I’ve been active in the condo market in the past year, in part trying to generate business and also to educate myself on the issues.

    Eighty percent of condo owners I’ve spoken with cannot get their association or management company to participate in the approval process, for various reasons. I’ve heard from some that ask “what’s in it for me?” Sickening, when a HECM is really the client’s only option of tapping home equity for survival. Most of the time, they say it’ll need to be voted on at a future HOA meeting, but I follow up, and they do not respond.

    Of the twenty percent that are able to pursue the approval, they fall into two categories, approvals (6%) and rejections (14%). The rejections generally happen for one of three reasons – owner occupancy, cash flow/reserves, & leasing restrictions. If we cannot move back to the spot approval process, surely we can ask HUD to drop the leasing requirements? Is fighting that battle really worth limiting financing to seniors? I get the concerns over cash reserves and owner occupancy.

    I’ve read H.R. 3700, and while it has good intentions, it will have very little impact on HECM lending in the condo market. It may move the needle a few percent on the 20% of condos that submit an approval. Maybe that’ll shift from 6% approvals and 14% rejections to 10% and 10%, respectively. Is that satisfactory? Condos are a very good housing fit for many seniors, so we shouldn’t be satisfied with being able to work with 10% of them.

    We won’t be able to make progress on this until you take the power out of the hands of homeowner’s association board members and management companies. If you have any experience with these folks, you’ll wonder how 6% of condos are even FHA approved. Generally speaking, neither group cares about the welfare of our senior population or even understand the role HECMs play in retirement.

    My suggestion is to go back to a spot approval process, but put the onus on the lender to verify certain non-negotiables that HUD will verify at the time the loan is submitted for insurance. Make the list of items that are required something that the condo owner & loan officer can obtain in a joint effort. Generally speaking, we can get our hands on a condo questionnaire, budget, bylaws, insurance, and flood cert. It’s harder to obtain the legal docs (if they aren’t recorded) and a balance sheet.

    To wrap this long post up, the only way we make progress in condo lending is if HUD is willing to move back to a new spot approval process. It was poorly managed before 2010, so make it much more difficult now. The key component has to be that the condo unit owner can pursue an FHA loan on their own. From there, I’m happy to abide by whatever components they decide are necessary to keep the MMI fund in the black.

    • Matt,

      As of the end of fiscal year 2014, the balance in the HECM portion of the MMI Fund was a negative $1.166 billion and HUD has taken $6.546 billion from other MMI Funds along with an additional $1.686 billion from the US Treasury and put them all into the HECM portion of the MMI Fund. In fiscal 2014, HUD did take $770 million out of the HECM portion of the MMI Fund to offset the amounts it has received. Of course none of these numbers include intrafund earnings on the amounts currently held in the HECM portion of the MMI Fund.

      Without the transfers (and net of the repayment but without consideration for intrafund earnings), the balance in the HECM portion of the MMI Fund would be a negative $8.628 billion rather than $1.166 billion. So new risk of any kind seems inappropriate until the balance is in a much better situation.

      Unfortunately fixed rate Standards harmed the balance in the HECM portion of the MMI Fund so horribly that we may not see a time when new risk is appropriate for decades.

  • Fannie and Freddie do not have an approved condo list. They require a condo questionnaire. If their minimum requirements are not met, they won’t insure the loan. There is really no reason why HUD can’t follow the same rules or procedures when it comes to a spot approval. Many of these condo associations would qualify but are simply too lazy to file the paperwork. The Board Members don’t understand the benefit of the HUD approval for their residents and really don’t care. The condo questionnaire can absolutely ask about the reserves, occupancy percentage (primary vs investment), commercial use percentage, number of units, etc. I would say they should limit the number of spot approvals as a percentage of the total number of units. If for whatever reason the project does not meet minimum standards, then HUD should not grant the spot approval.

    • I’m not in the reverse mortgage industry, but a standalone, two family homeowner (very satisfied with the reverse mortgage, line of credit option).

      Imo, it should be written into the congressional bill that all condo HOAs be automatically “signed-up” for reverse mortgages procedures for individual condo owners’ application eligibility.

      That way, it would be the various HOAs responsibility to have all required information available for the lender/HUD, etc. It would then be just a matter of whether the individual condo complex meets the basic fiscal and “upkeep” aspects, as any other individual homeownership requirement.

      • That’s a really good idea about the congressional bill and not one I had considered before. I’ll be curious to find out from those with more experience with lobbying whether this would be easier to accomplish at the state level.

        Simply stated, the bill would require a condo association or management company to supply a condo owner with the documentation necessary to pursue FHA approval. Any fees associated with the approval cannot be forced on the association though, so that would have to be addressed.

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