Pressure Mounts on FHA to Relax Condo Rules

12.11.2015
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Lawmakers and housing groups are urging the Federal Housing Administration to relax its condominium regulations to help open up homeownership opportunities for first-time buyers and urban families.

More than 50 House members signed a letter last week asking the FHA to make policy changes.

“FHA places significant restrictions on the purchase and sale of condominium, even though they are often the most affordable homeownership option for first-time buyers, small families, urban and older Americans,” said the Oct. 13 letter, whose signers included Reps. Emanuel Cleaver, D-Mo., and Mike Fitzpatrick, R-Pa.

Rep. Blaine Luetkemeyer, the chairman of the House Financial Services subcommittee on housing, held a hearing Tuesday on his bill that would force the FHA to make significant changes to its condo rules. The “Housing Opportunity Through Modernization Act” would streamline FHA’s certification requirements for condo projects, allow more commercial space in agency-approved condo buildings and relax owner-occupancy requirements.

“Current FHA regulations prevent buyers from purchasing condominiums, harms homeowners who need to sell their condominiums, and limits the ability of condominium projects to attract resident buyers,” said Chris Polychron, the chairman of the National Association of Realtors, during the hearing.

FHA has endorsed far fewer condo loans in recent years. It backed only 22,800 such loans in 2014, down from 57,830 in 2013 and 93,470 in 2010.

The NAR and National Association of Home Builders, as well as advocates for public housing programs and assisted living programs, are pushing Luetkemeyer’s bill.

The Luetkemeyer bill includes provisions regarding Section 8 rental assistance and public housing programs.

But the Mortgage Bankers Association is not supporting the bill yet.

“MBA has been in favor of a review of FHA condo rules, as many of the current rules were enacted during the crisis. We are still reviewing the specific provisions within this legislation, but the environment has changed and the rules should change accordingly,” said Steve O’Connor, MBA’s senior vice president of Public Policy and Industry Relations.

The bill has garnered strong bipartisan support from members of the subcommittee.

“I want to commend the author,” said Rep. Brad Sherman, D-Calif. “I look forward to working to get this bill on the floor of the House.”

Rep. Al Green, D-Texas, told Luetkemeyer that he has been a “real friend to those who are in need of housing in this country.”

So far, the House Financial Services Committee has not scheduled a vote on the Luetkemeyer bill. But earlier this year, Department of Housing and Urban Development Secretary Julian Castro said FHA is working on a condo rule. Industry groups, however, are getting impatient and they are trying to spur some action. HUD did not respond to questions from this publication regarding the status of the condo rulemaking.

Rep. Joyce Beatty, D-Ohio, said many people in her district live in condos. “I think FHA is supposed to issue rules by the end of the year that could make it easier for lenders to finance loans for condos.”

Beatty called on FHA to ease its owner-occupancy requirements. Currently, 50% of the residents in a condo building must own their unit before FHA will approve a condo loan. The Luetkemeyer bill would reduce this owner-occupancy requirement to 35%.

The Ohio congresswoman also complained about FHA’s requirements for re-certifying that a building meets FHA condo requirements. “I have heard from a lot of stakeholders that the restrictions have made the FHA re-certification process daunting at times especially for smaller properties,” she said.

Polychron told the subcommittee that the 95-page recertification document is burdensome and expensive because it requires a certified financial statement. Recertification documents must be filed with HUD every two years. He would like to see the recertification requirement extended to three or four years.

Kevin Kelly, president of the National Association of Home Builders, testified that reducing the restrictions in FHA condo financing will assist first-time buyers and condo owners who want to move up to a single-family detached home. “Condominiums are critical to the natural progression of homeownership and provide affordable solutions,” Kelly said in a written statement.

The bill also would provide a big boost for the Rural Housing Service single-family program. It would provide direct endorsement authority so that lenders can approve loans without waiting for RHS staff to approve the loan application. Direct endorsement would ease burdens on RHS staff, accelerate processing time for borrowers and align the RHS program with FHA and other mortgage financing programs. “These efficiencies are particularly important to attract participants to lend in rural markets,” Kelly said.

 

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