Condos Continue to Cause Reverse Mortgage Headaches

The Federal Housing Administration approval process for condominiums continues to be a headache for loan originators who have prospective clients interested in Home Equity Conversion Mortgages.

Currently, an entire condominium community must be approved by the FHA for a resident to open a HECM. But many originators said they are met with resistance from condo boards when they approach about beginning the approval process.

Of the estimated 170,000 condo associations in the country, only 9,965 are FHA-approved, according to data from the FHA-approval consultants FHA Pros, LLC.

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In the Chicago area, David Hochberg, vice president of mortgage lending on Team Hochberg at PERL Mortgage, said about 50% of his HECM applicants with condos live in non-FHA-approved communities.

“We have more than 400 people on waiting lists in condos who have called us from our radio ads to secure a reverse mortgage and can’t because of their management companies,” he said. “They’re bummed. They are extremely upset.”

Philip Parziale, chief operating officer and general counsel of Mahwah, N.J.-based Nationwide Equities Corp., is experiencing a similar situation with his potential borrowers in the New York City area.

“Just because they live in a condo and not a single-family home, they are being deprived of a benefit that other people can get, and it’s really not fair,” he said.

Potential borrowers are often told by their condo associations the building is FHA-approved, Hochberg said, but when they begin the loan process, it turns out the approval lapsed years before. Few condo boards want to begin the process again, even when Hochberg’s company offers to complete all approval paperwork without a fee. The main reason condo boards give him for not pursuing FHA-approval seems to stem from a general misunderstanding about HECM borrowers, he said.

“They say, ‘We don’t want those type of people living in our condo,'” he said. “I still haven’t figured out what that means.”

More than anything, he said, declining FHA approval does a disservice to the condo owners.

“These people have been living there 10, 20, 30 years, and their spouses have passed away,” he said. “The same people who have been paying their assessments, who never complain, and are good neighbors.”

RMD contacted a Chicago-area association of condo associations for response but had not received one by press time.

Waiting for HUD

When a condo development — or other community, such as the Sun City developments — runs into problems with FHA lending, originators agree that the FHA’s former spot approval process would fix many of the problems. Spot approvals, which were eliminated in 2009, allowed single units in non-FHA approved buildings or communities to become FHA-approved on a case-by-case basis.

For the last two years, the industry has been waiting for a clear and final condominium rule from the Department of Housing and Urban Development.

HUD’s last word on the subject was in September 2017, when an FHA proposal that would bring back spot approvals — also called “single-unit approvals” — was opened for public comment.

“This has been long overdue,” Hochberg said.

According to the news release at the time, “FHA proposes to reinstate single-unit approvals in unapproved condominium developments and require condo projects to recertify their approval status every three years rather than the current two-year requirement.”

But still nothing firm has been decided, Brian Sullivan, a spokesperson for HUD, told RMD.

“We haven’t gone final with a condo rule, but there was a proposal for single-unit condos in developments that don’t have FHA approval,” he said.

Not only would spot approvals assist the residents waiting for HECMs, but they also could give a boost to lagging volume following last year’s HECM rules changes, Parziale said.

“It would be a great lifeline for the industry, too,” Parziale said. “After October 2, I wish HUD would do something to help with the volume.”

Written by Maggie Callahan

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  • Until the spot loan approval process comes back into play (If ever) you might as well forget about the HECM being a loan to be able to be used in a non FHA approved project!

    The only game in town for a spot loan approval for the condo is a proprietary program. However, the problem with that product is it can only be used on principle limit balances over $500,000. There are some but very few condos it can be used for!

    I can’t understand why HUD will not move quickly to reopen the spot loan condo approval process. It would most definitely aid in the increase of origination’s and endorsements in our industry!

    John A. Smaldone
    http://www.hanover-financial.com

  • The article cited a couple of cities as examples of the condo-FHA-approval for HECM situation.

    I can add that, in the Boston area, the most desirable areas (affluent towns, yet with close proximity to Boston, and condo-location with direct access to a major highway(s), has a very significant incidence of “approved-but expired” status for condos in these various towns.

    This is the HUD site for FHA condo-HECM-approved status list for Reading, Massachusetts that fits the typical, optimal-location criteria I stated, above:

    https://entp.hud.gov/idapp/html/condlook.cfm
    (The site-pages “default,” so you’ll have to “plug-in” “Massachusetts,” and then “Reading” for the “city.”)

    You can do your own analysis by noting the location, size, price-range and year-built, etc., in determining the “similar characteristics” of the condo developments that fall into the “approved/expired” category. Generally, these are fairly new, “higher-end” developments. “Oddly,” the “older/smaller” condo properties are the ones that kept their FHA approvals up-to-date.

    It seems to me that these “expired-developments” were conscientious about “covering” and offering all buy/financing options for original buyers of a condo. And I’m guessing that, a few years later (after build-out), after the original developers were out of the process, and an HOA board became occupied by “resident-condo-owner/HOA board-member” individuals, they let the FHA-condo-HECM-approval status expire.

    The focus changed:

    The original developers wanted to sell condos= FHA-HECM-approval.

    The owner/occupied HOA boards just want to maintain a status quo occupancy-level here ‘n there whenever a unit becomes “available” = FHA approval expiring.

    It’s a money-driven situation.

    The original developers benefited by selling as many condos as quick as possible. An FHA-HECM-Condo Approval could help.

    The current HOA boards are helped by condo occupants who can pay the condo fees and their own forward mortgage payments. A condo occupant who needs a HECM for cash flow purposes suggests a risk to the HOA boards.

    Yes, (if my theory is correct) it does all swing-back to “not understanding the true nature of the HECM;” i.e., It’s more likely that existing condo owners will have no problem with paying their condo fees, etc., if by getting a HECM, they remove the cost of their mortgage payments, completely. The eventual debt is non-recourse.

    Maybe the approach to the condo HOA boards in convincing them to update their FHA approval status should be: “Are you having problems because of existing condo-owners’ financial situations? Here’s a solution. Let me tell you about the HECM; all you need to do is update your FHA approval status, ”

    Give the HOA boards a “money-incentive.”

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