At a time when our two major political parties can seem to agree on nothing, in an astounding turn of events, both the House and the Senate approved legislation that has been signed by President Obama, that, in part, revises how the Federal Housing Administration is required to evaluate condominium projects for FHA insurance.
Since the economic meltdown in the Great Recession, one of the major concerns for folks living in condominium projects is whether the FHA would approve the project for FHA insurance of mortgages on units in the project. Before the Great Recession, condominium projects essentially obtained a “life-time” approval unless it failed to meet certain fairly loosely regulated criteria. With the Great Recession, HUD decided it was unwilling to underwrite insurance on condominium projects unless the project met substantially tighter requirements, including owner occupancy requirements, limits on investor owned units, restrictions on legal actions by or against the association, reserve requirements, owner arrearages in the payment of assessments and other matters.
On Friday, July 29, 2016, President Obama signed H.R. 3700, known as the Housing Opportunity through Modernization Act (as mentioned previously in this blog, the legislation passed out of the House of Representatives with UNANIMOUS approval). H.R. 3700 reforms the process used by FHA to determine if condominium unit owners qualify for a mortgage with FHA insurance. Congress has recognized that FHA’s condominium re-certification process was too burdensome. Significantly, H.R. 3700 requires the Secretary of HUD to issue guidance regarding the percentage of units that must be occupied by the owners (or sold to owners intending to meet such occupancy requirements) in order for the condominium project to be eligible for FHA mortgage insurance. If the guidance is not issued within 90 days, the owner occupancy requirement is reduced from the existing majority of all units to 35%. FHA may increase the 35% for a project on a project-by-project or regional basis after considering factors related to the economy of the locality in which the project is located.
In addition, the FHA must apply to FHA mortgage insurance the existing standards of the Federal Housing Finance Authority relating to private transfer fees as those standards are applied to Fannie Mae and Freddie Mac mortgages. Under Fannie Mae and Freddie Mac, transfer fees may be imposed by a community association exclusively for purposes which provide a direct benefit to the property encumbered. Generally, the transfer fees assessed by community associations (or their managers) to offset the cost of handling the transfer will now be acceptable to the FHA, and will no longer disqualify a condominium project from being eligible for FHA project approval.
Stay tuned, as we eagerly anticipate the adoption of the new guidelines by HUD. We’ll keep you posted!