Everybody knows that congressional Democrats and Republicans can barely agree on anything. Yet in a rare and fleeting moment of unanimity in the House of Representatives, they recently approved legislation that could expand purchase prospects for thousands of people looking to buy their first home.
By a 427-0 vote, the House passed the Housing Opportunity through Modernization Act, co-sponsored by Reps Emanuel Cleaver, D-Mo., and Blaine Luetkemeyer, R-Mo. Among other provisions, the bill would force the Federal Housing Administration to ease rules and restrictions that have essentially turned the agency’s once-vibrant condominium unit financing program into a minefield for would-be purchasers, condo associations and lenders.
The FHA is the government’s principal agency for helping consumers buy affordable homes. It does not lend money itself but instead insures mortgages made by private lenders. FHA requires as little as a 3.5 percent down payment on loans it insures, allows more flexible debt-to-income ratios than most other mortgage sources and tends to be more lenient on applicants’ past credit problems. As a result, FHA has long been the go-to mortgage source for young, first-time buyers, many of them minorities. The condo unit financing program was especially attractive because in most markets, condo units cost a median 20 percent to 30 percent less than single-family detached houses.
But at the start of this decade, FHA adopted a series of controversial restrictions that have sent its condo mortgage business plummeting. It required condo associations to obtain onerous and sometimes costly certifications of their financial eligibility, plus recertifications every two years. The agency also stopped insuring so-called “spot” loans on individual units in uncertified condo developments, cutting off unit owners from selling to buyers using FHA mortgages.
Because of these and other restrictions, thousands of condo associations nationwide have dropped out of FHA eligibility altogether. Today, according to congressional estimates, barely 10 percent of all condo developments in the U.S. are eligible for FHA-financed purchases. Total FHA loan volume has shrunk from just under 100,000 condo units seven years ago to 22,800 in 2014.
Under the bill, FHA will be required to:
▪ Streamline its recertification procedures to make them “substantially less burdensome” for condo associations.
▪ Lower the minimum owner-occupancy ratio to 35 percent from the current 50 percent, unless the agency adopts and justifies a different minimum within 90 days of enactment of the legislation.
▪ Abandon its current restrictions on “transfer fees” that many condo associations collect when units are sold. The fees typically are used to support community services and are an important budget item.
These may not sound like dramatic changes, but condo industry experts say they will have major positive effects. Seth Task, a real estate broker and condo specialist with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says the reduction in the owner-occupancy requirement is crucial to the financial health of many existing condo projects where the ownership ratio doesn’t meet the 50 percent threshold. In those developments, no units currently can be sold to buyers who choose or need to use FHA financing. The net effect in many cases, according to Task and other critics, has been to reduce the number of potential buyers for any given unit and ultimately reduce the unit’s market value. Task has seen it in his own transactions, where sellers in uncertified buildings have had to turn down offers from well-qualified FHA buyers, and then are forced to accept below-market offers thousands of dollars less from bottom-fishing all-cash investors who don’t even plan to live in the unit.
The new legislation “will actually increase owner-occupancy” in those buildings, Task predicted.
The ratio change will also help open up sales in some newly constructed condominiums where the builder still owns more than half of the units being marketed, but can’t sell to FHA buyers because the entire project is ineligible. Ending the transfer-fee ban and streamlining the recertification process should help convince condo associations who have left the FHA fold to reconsider applying for eligibility, according to Rita E. Tayenaka, a realty broker and past president of California’s Orange County Association of Realtors. The reforms “will be a great improvement for condo financing,” she believes.
Bottom line: The bill is great news for first-time and moderate-income buyers, but don’t expect changes overnight. It still must pass the Senate and get the president’s signature, but a 427-to-zero bipartisan vote in the House bodes well for both.