Pressure has been building recently from lawmakers and housing advocates for HUD to trim its condominium rules and regulations in order to assist prospective borrowers in obtaining FHA financing on condominium units.
Many feel that there is too much paperwork involved with the current process of obtaining FHA project approval and re-certification and that many of the rules are too restrictive. Before we take a look at the current process – let’s discuss the not-too-distant past.
In 1996, HUD/FHA implemented a “Spot Loan” approval process designed to help facilitate the approval of an FHA loan involving a unit in a condominium project that had not previously obtained HUD/FHA approval.
Under this process (which was outlined in Mortgagee Letter 1996-41), lenders were required to address a number of items on a “suggested checklist” that was attached to this Mortgagee Letter and, if all items were found to be acceptable, could close the loan transaction and obtain FHA mortgage insurance without any prior approval from HUD/FHA.
The items contained on this checklist included verification that 51% or more of the units were owner-occupied, at least 90% of the units were sold, that no single entity owned more than 10% of the total units, that there was an adequate reserve account separate from the operating funds, etc.
The problem with this process was that FHA reviewed less than 10% of the loans that they insured and many checklists that were processed contained false or inaccurate information. As a result, FHA was insuring loans on condo units in projects that were not sound.
In 2009, HUD/FHA eliminated the “Spot Loan” approval process in lieu of a formal project review by HUD staff (HRAP) or by an approved lender (DELRAP) as well as a re-certification process. At the present time, FHA loans cannot be obtained on a condo unit unless the project in which it is located has been previously approved and/or re-certified.
Today, there is a voluminous amount of paperwork that must be reviewed by HUD and/or the approved lender in order to obtain approval status. A typical re-certification package includes the following (not a complete listing): cover letter, legal documents, recorded plat map, covenants & conditions, master deed, articles of incorporation, site plans, management agreement, FEMA flood map or elevation cert, evidence of insurance coverage, master flood policy, liability insurance, fidelity bond insurance, current Declaration pages for all policies, evidence of transfer to HOA, etc.
Despite such a thorough review – Condominium Project Approvals expire in only two years and the re-certification process will begin 6 months prior to the approval expiration with the availability to re-certify up to 6 months after the approval expiration. If the project is not re-certified within this time period, a full project approval is required.
Obviously, the procedures implemented in 2009 have helped protect the FHA insurance fund since condo loans currently insured by HUD are located in projects that have demonstrated that they are sound financially and meet various risk factors – some of which are derived from regulations which cannot be waived.
The flip side of this argument is that the overwhelming majority of FHA purchase transactions involve first-time homebuyers and condominiums are a viable option for first-time buyers in many markets. However, the number of rules and the onerous paperwork burden in obtaining FHA project approval has resulted in far fewer FHA insured loans involving condo units.
My “prediction” is that HUD will ultimately extend the number of years that a condo project approval is valid from the current standard of two years and cut back on some of the paperwork requirements.
However, many of the other condo-related regulations (i.e. the owner-occupancy requirement, pre-sale threshold, etc.) must be authorized by Congress and I don’t expect much agreement in Congress on changing those regulations. If you reduce or eliminate some of these standards – you increase the risk to the FHA insurance fund. Quite a delicate balance!