For young first-time buyers, people with modest down-payment cash or seniors who want to tap their equity using a reverse mortgage, it's a growing problem: They cannot use Federal Housing Administration financing in condominiums.
It's not that these buyers and unit owners can't qualify on credit and income grounds for a loan personally — they often can. Instead, it's because the entire condominium development is ineligible. As the result of policy changes at the federal level and decisions by condominium boards of directors, thousands of communities have essentially become prohibited lending zones for the FHA in the last several years.
The agency has banned so-called spot loans and will insure mortgages only on units in condo projects that have passed a certification process that examines budgets, reserves, insurance coverage, percentage of renters in the development, and delinquencies on payment of condo fees.
The procedures weed out fiscally weak, poorly managed developments and reduce taxpayer exposure to future losses, the FHA says. Condominium boards, on the other hand, contend that some of the evaluation criteria are too strict and that the certification process is bureaucratic and costs them money they'd prefer not to spend.
Since toughening its financing rules and requiring certification of entire projects four years ago, the number of condo developments approved for FHA financing has plunged by more than half. As of mid-month, it stood at just 10,020 communities, according to an FHA spokesman. Industry sources estimate that the total number of condo projects nationwide is around 144,000.
FHA financing is important because of the special niches it fills. Among the three major federal lending intermediaries — Fannie Mae and Freddie Mac are the other two — the FHA is the most flexible on credit issues. It is also lenient on debt ratios and allows down payments as small as 3.5%.
As a result, the FHA has been the go-to mortgage option for moderate-income buyers for decades and has been a key resource for African American and Latino buyers, many of whom have made their first purchase in a condominium development.
The FHA also plays an outsized role in the reverse-mortgage market for seniors 62 and older. Its insured reverse-mortgage product accounts for more than 90% of all borrowing in that field, enabling seniors to extract cash from their home equity to support their retirement expenses.
But with the sharp decline in FHA-approved condominium projects, many buyers and unit owners are finding themselves financially frozen out. Equally troubling, unit owners who want to sell find the pool of potential buyers reduced — along with the market value of their property — because FHA mortgages are banned.
Seth Task of Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says a condo unit client his firm represented recently was forced to sell for $10,000 below what she had been offered by a buyer who was pre-qualified for an FHA loan — a loss solely attributable to the condominium's noncertified status.
Situations like this are becoming more frequent, housing industry experts say, and the lack of FHA financing eligibility for entry-level-priced condo units is partially responsible for the decline in first-time buyer participation in the real estate market.
But now a movement is underway to reverse this shrinkage. At this month's spring legislative conference of the National Assn. of Realtors in Washington, California brokers and agents unveiled a campaign to persuade condo boards to re-think their objections to FHA certification — for their unit owners' sakes.
The primary focus, said Mike DeLeon, president of the Orange County Assn. of Realtors, which debuted an educational video at the conference, is to show reluctant condo boards of directors "the positive benefits" of certifying with the FHA. The video stresses "keeping condo unit values at their highest" by widening the pool of potential buyers; helping unit owners tap their equities for retirement; and the relatively low risk of default presented by today's FHA buyers.
Is there a broader message here for condo boards nationwide? Maybe not so much for those in the high-priced market segments that the FHA rarely serves — but even their owners are cut out of FHA's dominant reverse-mortgage program.
For most other condo developments, however, the message is this: Give some thought to the issue. FHA certification has its complications and costs, but it could be more than worth the effort for your current residents and future buyers.