In late 2019, the Department of Housing and Urban Development issued new condominium guidelines that aimed to make it easier for single units to be approved for Federal Housing Administration (FHA) financing. This included transactions under the Home Equity Conversion Mortgage (HECM) program.
Historically, an entire condo complex would need to be approved for FHA financing in order for one unit to receive the financing, so the changes are significant. In terms of the new rules’ effects on originators, there has been a discernible effect in certain parts of the country, but additional perspective is provided when asking major lenders and brokers about the effects of the new condo rules handed down late last year.
While the new guidance has made it slightly easier to gain a single-unit approval, in many cases the process seems to remain in the realm of requiring a full project approval, according to reverse mortgage industry participants at several levels.
Responses from major lenders
For some of the leading lenders in the reverse mortgage industry, the new condo rule changes have proved to be a generally positive development even if the simplicity around the process has not been significantly enhanced. This is according to Kendra Rasmussen, VP of credit at American Advisors Group (AAG).
“Since the rule changes, we’ve received a significant number of requests for single unit condominiums seeking a HECM,” Rasmussen tells RMD. “While many of these still require us to submit for a full project review, it has given us a chance to help more seniors than ever before.”
Even if a full project review is required, though, AAG has seen a noticeable uptick in approvals since the new rules were first handed down.
“In fact, in the [seven] months since the rules were implemented, our team has gained FHA approval for more than 100 projects, which is nearly 80% greater than the entire previous year,” Rasmussen shares.
At Finance of America Reverse (FAR), the new rules have opened up a new segment of business, according to a company spokesperson.
“The new rules have opened up our products to a new set of customers, who may not have qualified for a reverse mortgage in the past, and we’ve seen our condo business increase since Single Unit Approval (SUA) was introduced,” the spokesperson says. “In many cases, the condos are approved by submitting the project to HUD for full project approval (HRAP) because the borrower or the project does not meet HUD’s SUA guidelines.”
The SUA guidelines do have some restrictions, however. These include a limit to the number of units that can be approved in a particular project, along with a concentration requirement from FHA which says it must be 10% on SUA vs. 50% on HRAP, the spokesperson describes.
“The borrower must also pass the residual income requirement with no compensating factors and has to have an acceptable property charge payment history with no extenuating circumstances allowed for any late payments,” the FAR spokesperson says. “If the unit does not qualify for SUA, we already have most of the required documentation for HRAP with HUD since the documentation requirements are very similar.”
Even if a particular borrower does not qualify for SUA, FAR will try to obtain full project approval in that instance.
“[We] are successful around 80% of the time,” the spokesperson says.
Effects on reverse mortgage originators
“It’s definitely made more properties available,” says Laurie MacNaughton, a reverse mortgage consultant with Atlantic Coast Mortgage in Fairfax, Virginia.
While MacNaughton’s business is totally referral, she’s pleased to see that the new guidelines have made the product available to more prospective reverse mortgage applicants. But it doesn’t come without its challenges. In order to qualify, condo associations have to carry their own insurance, and there aren’t a lot of condos that fit that bill, MacNaughton says.
“Most condo associations are not set up to align with the FHA requirements,” she says. “I’m not sure why the FHA wrote it so narrowly.”
When applied to older properties, the new rules also require a few steps. First, you need to check if the condo ever had its FHA approval, then you need to ask if the association is interested in reapplying for it. But the biggest hurdle, she says, is then determining who will pay for it. Fortunately, MacNaughton says she primarily deals with new condos that already have their FHA approval.
“In the outskirts of Washington, D.C., where I work, there is a ton of new construction, and some high-value ones, so they immediately apply for the approval,” she says.
While she hasn’t noticed a huge uptick in inquiries since the new guidelines were put in place, she is happy they’re there.
“A huge percentage of what I do is funding the last chapter of someone’s life,” she says. “I’m not really a marketer, I just want to help. And these new rules potentially allow me to help more people.”
Effects on brokers
For brokers that generally have a high level of volume in major reverse mortgage business areas, the rules have yet to make a substantive impact on business in terms of single-unit condo approvals because of some specific requirements. This is according to Scott Harmes, national manager of the C2 Reverse division of C2 Financial Corp in San Diego, Calif.
“[The situation is] evolving, I would say,” Harmes tells RMD. “We’ve been told by our major lender partners that they are getting those single unit approvals through, but they’re also telling us that the documentation requirements aren’t like the old spot approvals.”
“Spot approvals” previously allowed single unit condominiums to be approved for a reverse mortgage without the approval of a full project, which featured less burdensome requirements and enabled many seniors to obtain reverse mortgages for their living spaces.
Spot approvals were revoked by FHA in early 2010, and while some felt that the new condo rules might be akin to a partial return of spot approvals, the actual process for getting a condo unit approved under the new conditions are more onerous, Harmes explains.
“The documentation requirements are more akin to getting a full complex approval,” he says. “I do think [the rate of condo approvals is] improving anecdotally, but for C2, I don’t think there’s been a dramatic positive impact yet.”
Meredith Landry contributed reporting.