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Status of FHA Reforms

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For years, CAP Management has been in the business of pursuing FHA certification for condominium associations. While we have been successful in getting HOAs FHA certified, it has not been without difficulty in some cases. HUD has recently acknowledged how cumbersome the FHA approval process is and, with the urging of higher powers, has unveiled some reforms. This blog examines the state of these changes.

The U.S. Department of Housing and Urban Development (HUD) offers mortgage insurance which favors first-time home buyers and similar parties who benefit from a degree of certainty on loan rates through its Federal Housing Administration (FHA). In order to get condominium projects (yes, just condos) approved for such mortgage insurance in a blanket manner (affecting all residential units), an application has to be submitted on behalf of the HOA. Once an application has been approved, an association can be considered “FHA certified.” The certification process can be arduous.

Typically, a great deal of effort must go in to collecting all of the supportive paperwork for a FHA application. This can be tricky because not all required items (e.g. site plans for multi-phase projects) are readily available in a manager’s files (due to management transfers, etc.). It takes time to visit county clerks, contact insurance agents and attorneys, and other parties to get all of the information and documentation needed. While it is time consuming, this is fine. If anything, it makes a HOA’s records more complete and up-to-date – a good thing. The difficulty arrives with a rejection notice. Sometimes, applications are approved after only one application submittal. Other times, HUD rejects the application due to technicalities. Examples we have come across include: condo declarations not properly evidencing the actual construction of all units (even if maps and satellite imagery show they exist); a missed initial; discrepancies in document recording; numbers being slightly off on a financial document; insurance documents missing a line of information; and other issues which require time, the effort of digging through county records on obsolete technology, and/or tedious toying with numbers to produce the perfect document to appease the application review technicians at HUD. Sometimes, the application will bounce back and forth several times, each time taking HUD weeks to review, even if for changing a single paragraph or number. In short, the process can take months with buyers stuck in limbo in the meantime.

Over the summer, HUD Secretary Julián Castro publicly acknowledged that these processes make obtaining FHA certification difficult and announced that some changes to the certification process would be coming. Congress and President Obama agreed that FHA needed a cleanup and H.R. 3700, the “Housing Opportunity Through Modernization Act of 2016,” was signed into law on July 29, 2016. Title III of the law explicitly states that HUD must “modify its certification requirements for condominium mortgage insurance to make recertification substantially less burdensome.” Actions which can achieve that directive include, specifically: lengthening the period where one can submit current information and insurance/financial documentation (recertify) rather than have to submit all documents all over again as if the property were never approved; use flexible discretion in analyzing the impact of commercial space in condo projects; and new guidance on the number of units which must be owner-occupied.

The first item regarding recertification is quite nice to see. It should reduce paperwork and processing times for sure. CAP was actually able to use a new “recertification checklist” with a recent FHA recertification application and it was approved on the first try. This took place after H.R. 3700 was signed into law. Glad to see that is working! We’ll skip comment on commercial space because those HOAs are less common and we haven’t had problems in that area. But for onsite resident numbers, we could really use some help. Currently, 50% rental composition is disqualifying. But what about other investment units? How many homeowners must be onsite and have no other mailing address? It is important to know if the number will be reduced because, especially in our area, more and more owners are renting out their condos to take advantage of our incredible housing market. This, in effect makes fewer HOAs certifiable if the number of rentals is kept at 50%. If HUD declines to offer clarification within a certain time frame, the minimum percentage of onsite owners will be reduced to 35%. The clock is ticking…