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Condo sales challenge: Restrictive FHA rules


 

SAN FRANCISCO – Nov. 11, 2013 – While the Federal Housing Administration (FHA) has loosened its condominium approval requirements in recent years, many properties continue to struggle to meet overly stringent criteria and the majority of properties are still denied, according to a panel of experts today at the “How Do FHA Condominium Rules Impact Your Business?” forum at the 2013 National Association of Realtors® (NAR) Conference and Expo.

Condominiums are often the most affordable homeownership option for first-time buyers, small families, single people and older Americans, especially when purchased with low downpayment FHA-backed condo mortgages. But even though condo FHA loans were among the strongest performing loans in the FHA portfolio, FHA data show approximately 60 percent of condo projects seeking approval in 2013 were denied – that’s up from 2011 when only 20 percent of projects were denied.

Joanne Kuczma, housing program officer in the Office of Single Family Program Development at the Department of Housing and Urban Development (HUD), listed the top reasons FHA project approval is denied: financial instability, pending litigation, insufficient insurance coverage, and outdated or missing documentation, among others.

“The goal isn’t to reduce FHA’s footprint in the condo market, but to ensure that homeowners are buying into a viable, sustainable homeownership opportunity,” said Kuczma. However, HUD is working hard to improve the approval process and consider changes, she said, such as reinstating spot approvals for individual condo units in projects that aren’t already FHA approved.

Jim Cantrell, president of Cantrell, Harris and Associates, a real estate management and consulting firm in San Francisco, agreed with the top reasons for why projects are denied and offered advice to attendees for helping get condo projects approved.

“It’s critical to ensure that all the required documents are completed and filed correctly,” he said. “My advice is to ask the right questions of the right people and get it done right the first time; otherwise the process will be prolonged and that puts the condo sale at risk.”

Cantrell said while condo boards, management companies and developers can seek their own approvals, hiring a private third-party project consultant that specializes in getting projects approved can help reduce the timeframe and increase the likeliness of approval; the cost is usually between a few hundred and a few thousand dollars.

Dawn Bauman, senior vice president for government affairs at Community Associations Institute, said condo communities have grown tremendously in recent decades, from about 70,000 housing units in 1973 to nearly 26 million units today. Her advice for buyers and agents seeking to buy in those communities is to work closely with the seller.

“The best source for information is the individual selling the unit,” Bauman said. “They are a great contact for agents and their buyers to quickly get the information and paperwork needed for approval.”

NAR has advocated for reforms that would ease FHA’s burdensome condo financing rules and give consumers access to a wider choice of condo developments and increase affordable financing options. Those reforms include an extension of FHA’s recertification process from two to five years. To avoid a lapse, many condo projects currently begin the recertification process at least six months prior to the deadline, so many condo projects end up going through the recertification process every 18 months.

Another NAR recommendation: Simplify the recertification process, which requires the same amount of paperwork as the initial project approval. NAR believes employing an electronic filing system, similar to what FHA uses for its multi-family loan programs, would increase efficiency, improve data accuracy and help reduce costs.

According to Kuczma, HUD has heard the feedback from Realtors and others in the industry, and is evaluating the recertification process to make improvements and reduce the amount of required paperwork.

NAR also encourages HUD to align the condo approval standards across the housing finance system and create consistent condo approval guidelines for Fannie Mae, Freddie Mac, Department of Agriculture, Department of Veterans Affairs and other agencies involved in housing finance.

“Realtors believe that making these changes to FHA’s condo rules will help protect the long-term value of homeownership in the country and ensure the housing recovery stays on track,” said NAR President Gary Thomas.

NAR has also established a working group of Realtor members to review condo rules and guidelines and assess their impact on the market.

© 2013 Florida Realtors®

Related Topics: Condos