The Home Buyer's Korner

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November 8th, 2014

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FHA Condominiums

CondominiumsThe Federal Housing Finance Agency and the Federal Housing Authority needs to look just as much at where home buyers want to like as much as they are promising to lighten up on credit standards.  The demand for condominium units is rising in many urban areas nationwide, yet mortgage financing is getting squeezed for entry-level condo buyers by these federal agencies.

If you listen to real estate agents, listing prices for condos in major markets are rising faster than for single-family detached homes in the same area. Nationwide, condo sales are steadily taking away market share from traditional homes as suburban boomers downsize and millennials want to live closer to urban workplaces and city center attractions.

However, in recent years FHA significantly overhauled project approval guidelines for condominiums in an effort to reduce their risk after the real estate bust of 2008 and have all but closed out financing opportunity for what promises to be a highly desirable type of housing. Despite indications from FHFA as recently as last month that the government wants to loosen up on mortgage credit availability for middle-income Americans, the Federal Housing Administration continues to severely restrict the number of condo projects it makes eligible for FHA financing. The same restrictions make it impossible for large numbers of seniors who own condo units to obtain reverse mortgages, an important home-loan niche that the FHA dominates.

Despite FHA’s recent curtailment to participate in many condominium projects, most on the whole are doing well. Trulia, a data collecting real estate website reports that increases in asking prices in the 20 largest condo markets are outpacing increases in single-family asking prices.

In Miami, list prices for condos in September were 17 percent higher than the year before, compared with single-family list prices, which jumped 11.7 percent. In Boston, listing prices increased four times faster compared to single-family homes and in places like Washington DC and San Diego, condo listing prices rose by nearly double the rate of single-family homes. However, sales prices for condos remain significantly lower than single family detached homes on average nationwide and make them much more affordable.

Rising popularity and market share for condominiums reflects that condominiums have grown from roughly an 8 percent market share to between 11 or 12 percent and in some urban markets, the condo share is even higher.

According to CoreLogic’s DateQuick, Los Angeles condominium market accounted for about 27 percent of home re-sales in September and Miami it was approximately 44.9 percent.

The major problem we are facing today in the otherwise healthy condominium market is FHA’s curtailment of entry points at the lower ranges of the price spectrum.  FHA has always been the go-to source of mortgage money for first-time buyers and currently insures less than 7 percent of the country’s estimated 150,000-plus condominium developments. FHA has also stopped approving what are known as “spot” loans, which are mortgages in condo projects that have not applied for and received FHA certification. And, by the way the FHA project certification is burdensome on home owner associations and frequently the process only leads to rejection.

David Stevens, who was FHA commissioner in 2010 and now heads the Mortgage Bankers Association banned FHA spot loans, but says “it’s time to bring them back with reasonable restrictions”.  Why? Because for many young first-time home buyers, FHA is the sole source of low-down-payment financing.

All things being equal it’s true that FHA was confronted with significant condo foreclosures in the height of the real estate bust, but that was then and market has had a rebounded, while the crisis has abated.  As times change, so should FHA policies and support a housing market that a new generation of home buyers finds appealing.

The ban on spot loans has crushing impacts on seniors as well.  Many need to tap into their homes equity and want to use FHA’s reverse mortgage program to supplement their incomes, but can’t solely due to FHA’s current policy.

So is there a change FHA might readdress these policies? Maybe!

FHA hasn’t commented on whether it might loosen its certification restrictions or allow spot loans to home buyers and owners in uncertified developments that would otherwise qualify for an FHA insured mortgage. But, industry leaders and other sources say the agency is feeling the political heat from real estate and mortgage lobbies as well as coming from Capitol Hill. Let’s hope we’ll see a major overhaul of the condominium approval process in early 2015 that could bring back FHA financing to greater numbers of home buyers and existing unit owners.


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