HUD Softens Reverse Mortgage Ban in Some AZ Towns

Back in March, RMD brought you the story of potential Home Equity Conversion Mortgage borrowers in Arizona who were foiled by the abrupt enforcement of a previously ignored Federal Housing Administration regulation. Just last week, the FHA partially lifted the restriction by exempting condos, according to a local newspaper report — but players on the ground aren’t celebrating just yet.

“For now, nothing has changed for us,” Liz Recchia, the government affairs director for the West Maricopa Association of Realtors, told RMD in an e-mail.

The controversy concerns the so-called “free assumability clause,” a Department of Housing and Urban Development rule that prohibits the FHA from backing any loan that would require a cash outlay in foreclosure proceedings. For most reverse mortgage applicants, this isn’t an issue, but in 55-and-over communities such as Sun City, Ariz., it’s a devastating catch.


In these developments, anyone who receives a property — including through purchases and inheritances — has to pay a fee to a private recreation company, which in turn uses the cash for the maintenance of shared facilities such as pools and golf courses. It’s a novel twist on the traditional homeowners’ association fee, generally designed to reduce the monthly outlay required of homeowners going forward. 

But should the house transfer to a lender through foreclosure or deed-in-lieu, that company is on the hook for the shared maintenance fee, which violates the HUD “free assumability clause” by potentially forcing the federal government to pay for pool and recreation center maintenance. Though the regulation has been on the books since the early 1990s, HUD mysteriously began rejecting applicants in December 2016 using this rationale.

After local lenders and real estate professionals lobbied Washington, D.C. for a response, HUD abruptly lifted the free assumability restriction for condos in April but did not formally publicize it until June 27, according to a report in the Sun City Independent. 

“If you have a condo with a rec fee, as long as that fee benefits residents in that area, loans will be approved,” HUD field office director Stephanie Smelnick told the publication.

That language comes from 12 CFR 1228, which allows FHA loans on properties with mandatory transfer fees as long as they provide a “direct benefit” to the property, such as maintenance or improvements. Based on that regulation — which applies to loans closed after February 2011 — the Sun City management received confirmation that all FHA condo lending can continue as normal, Recchia said.

However, Smelnick told the Independent that there was still no clear guidance on single-family homes, and Recchia said she and the other stakeholders are waiting for a rumored mortgagee letter clarifying the situation. E-mails to two separate HUD officials were not returned to RMD as of press time.

Until then, the key could be arguing that the freestanding homes in Sun City count as condos for the purposes of 12 CFR 1228, Recchia added, though that plan is not foolproof.

“I’m not sure how well that argument will work given the houses were entitled as single-family detached homes, not condominiums,” Recchia told RMD. “Until I see the mortgagee letter, I won’t know if Sun City management has received loan approval or under what circumstances.”

Written by Alex Spanko

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  • 12 CFR 1228 I thought it was 24 203.41. No matter this is a horrible event for the seniors who live in these areas. Why now? Unbelievable after closing countless loans in these areas and now they close the door? Now all of my loan approvals have this condition on them, and we have to get the CCR’s from all who have an HOA to determine if we can take application. This closes a huge amount of FHA loans in AZ and CA. Hell is going to break lose when the populations affected actually wake up.

    • Ms. Faison,

      How does this position impact California? I have yet to see a transfer of maintenance fees to a HOA (unless those fees are past due) as part of a sale transaction. Where have you seen it?


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