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