Could condos financed with low-down-payment government-backed mortgages stage a surprise comeback under the Trump administration, which generally seeks to reduce federal involvement in housing? Would this be promising news for millennials and buyers with moderate incomes looking to purchase their first homes?
You bet — provided you take Housing and Urban Development Secretary Ben Carson at his word. Speaking to a mid-May National Association of Realtors convention, Carson said he is “in lockstep” with proposals to revive the Federal Housing Administration‘s condo financing program, which has been bogged down with controversial regulations and low volumes in recent years.
Though Carson did not offer specifics, he appeared to endorse some version of proposals made during the closing months of the Obama administration aimed at enabling greater numbers of buyers and condominium associations to participate in FHA’s condo program. One of the changes would give a green light to financings of individual units in condo buildings lacking FHA “certifications.”
Allowing single units to be financed — a return to what once was known as “spot” loans — would have potentially far-reaching impacts across the country, since fewer than 7 percent of condo projects or buildings currently have FHA certification, according to estimates by the Community Associations Institute, a trade group. Under current rules, units in noncertified buildings are ineligible for FHA mortgages.
To become certified, condo association boards of directors must submit detailed information regarding financial reserves, insurance, budgets and numbers of renters, along with a long list of other requirements. Thousands of condo associations dropped out of the FHA certification process after the Obama administration imposed regulations that were considered overly strict. Though leaders at FHA repeatedly said they recognized the importance of condos as affordable housing options, especially for first-time buyers, the agency only began loosening its red tape and regulations last year.
Dawn Bauman, senior vice president of government affairs for the Community Associations Institute, said the return to individual-unit financings “will be very helpful” for unit owners, buyers and condo associations themselves. Norva Madden, an agent with Long & Foster Real Estate in Maryland, said low-down-payment FHA financing on individual units “could work for sellers as well as buyers” and bring more affordable units into the market for sale.
Madden recounted an experience she had last year. An elderly woman listed a condo unit with her that was located in a building that lacked FHA certification. “The listing price was fair market” and affordable, said Madden, but the fact that the unit was ineligible for buyers using FHA loans was “a serious problem,” since most shoppers wanted to make use of FHA’s low-down-payment requirement (3.5 percent minimum) and generous approach to credit issues. Ultimately the seller moved out and reluctantly agreed to a lowball price thousands of dollars under list.
“Those buyers got a real bargain,” Madden said, but her seller, “who really needed the money,” didn’t do so well — all because FHA’s onerous regulations had discouraged the condo board in the building from seeking certification.
John Meussner, a loan officer with Mason-McDuffie Mortgage in Laguna Hills, Calif., says the forthcoming rule changes should open “the door to a pool of buyers that may not have a large down payment but may otherwise be qualified.” Renters in high-priced markets now will be able to buy homes, he said, since they’ll have an “accessible and affordable product.”
Christopher L. Gardner, managing member of national consulting firm FHA Pros, cited federal estimates suggesting that 50,000 additional FHA mortgages could be insured under the revived program in the first year alone. And thanks to competitive loan terms, it should pull in buyers who otherwise might have opted for nongovernment, conventional financing.
But not everybody is convinced that resumption of spot loans automatically will solve FHA’s — or consumers’ — condo problems. Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says the change will only be effective if the FHA makes it “very, very simple” for lenders. Under the program, lenders still will need to investigate the financial stability of the underlying condo association and property. If that requires too much time and red tape, it won’t work.
The takeaway: If you’re potentially interested in buying an affordable condo unit with a low-cash down payment, keep an eye on this issue. The FHA should announce its plans in the coming months, so start scoping out condos in your area — whether they’re FHA-certified or not.
Update on a previous column: “Zestimates” suit seeks class-action status. On May 19, plaintiff Barbara Andersen of Glenview, who was already challenging the legality of Zillow’s “Zestimates” realty valuation tool in court, filed a new lawsuit as co-counsel seeking class-action status, claiming violations of state privacy, deceptive business practices and appraisal statutes affecting millions of homeowners. Zillow called the charges in the original suit “without merit.”