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On October 26, 2016, as a result of the FHA condo financing requirements easing accorded under H.R. 3700, The Housing Opportunity through Modernization Act, the FHA announced their latest requirements for FHA financing approval of existing condominium developments, which states that owner occupied units shall remain at the current minimum requirement that 50 percent of the units, with an exception for existing developments to drop to 35 percent owner-occupancy ratio in specific cases where current financial documentation can be provided to FHA. In those cases, FHA stated it will allow that ratio to be reduced to from 50% to 35% owner-occupied ratio for existing condo developments if the following requirements are fulfilled:
...The Federal Housing Administration (FHA) has announced it will extend its temporary condominium project approval policy provisions without changes until Aug. 31, 2017.
The FHA decision ensures easing of condo owner occupancy requirements and a much broader definition of what is classified as "owner occupied" occupancy status as it effects occupancy percentages within a development.
The Housing Opportunity Through Modernization Act of 2016 (HR 3700) was signed into law by President Obama on July 29, 2016. Since then, a major focus of the law has been to provide consumers and their representatives with guidance and insight into the new FHA requirements regarding condominium mortgage insurance. The intention is to ease FHA condo financing rules to provide condo buyers easier access to financing and thus increase condo sales.
Ken Harney provided background on why many felt HR 3700 was necessary in his article in the Chicago Tribune:
“Critics pointed out that FHA once was the go-to source of condo financing for first-time buyers, but since 2010 its role has shrunk drastically. FHA helped finance 80,000 to 90,000 condo mortgages a year during the previous decade and a half, but more recently production has dwindled to barely a quarter of that volume. FHA condo lending in the first three months of this year plunged by 8.6 percent from the previous quarter, according to Inside Mortgage Finance, a trade publication. In the final quarter of last year, volume declined by 20.3 percent from the third quarter.
The agency's restrictions on condo community eligibility for financing became so onerous — requiring complicated re-certifications of entire developments every two years — that thousands of condo associations abandoned the program. According to the Community Associations Institute, fewer than 14,000 of the 152,000 condo associations in the U.S. are now eligible for FHA loans. Individual units are not eligible for FHA financing unless the entire association's finances, reserves, insurance, budget and other items have been approved by the government.”
As a result of the heavier governmental financing restrictions in the past six years, causing an increase in troubled condo associations who are still having problems with staying viable due to the mortgage meltdown and the more stringent FHA financing restrictions, numerous groups and associations lobbied the federal government to make FHA condo financing more accessible.
HR 3700 presents new guidelines to FHA’s condo rules to increase homeownership and ease of financing for condominium units, thus making homeownership more affordable and abundant while buoying up many HOAs across the country. Some of the new guidelines include the reduction of the FHA condo owner occupancy ratio from 50% to 35%. (FHA tentatively has 90 days from the passage of the act to make that guideline permanent.)
Besides the condo owner occupancy ratio reduction in a development, HR 3700 also now allows transfer fees in an FHA financing transaction. The legislation directs FHA to stop rejecting condo communities for approval because they collect small transfer fees when units are sold. The thinking is that the funds collected are used to support association activities which benefit all community members. FHA will now have to follow the lead of Fannie Mae and Freddie Mac, both of whom consider community-benefit transfer fees acceptable when financing a condominium.
The legislation also provides for more flexibility on the amount of commercial space permitted in condo developments. Many urban condos are now designed for mixed-use which means residential and commercial use are combined into one building or complex. Prior to HR 3700, some of these developments were ineligible because FHA set strict guidelines for commercial floor ratio to residential square footage, thus making the commercial floor ratio component excessive. The new legislation now requires FHA to be more flexible by taking the local market context into account.
Some critics of HR 3700 are concerned that the legislation, which also eased accessibility to low-income government housing assistance, will drain some of the money to help condo-buyers that HR 3700 was meant to free up. With the push and pull over limited available federal housing money, the future of homeownership for many could be restrained. That in turn would affect the many condominium homeowners associations across the country that depend on a constant supply of viable condo buyers to contribute to HOA dues and reserves.
Whether FHA can quickly implement the new guidelines for condo-buyers while keeping the new program solvent, still remains to be seen. But if all works as planned, the new program should increase homeownership and demonstrate to fledgling homeowners associations that they’ll receive a benefit in cooperating with FHA condo-buyers to help them qualify under the new
HR 3700 guidelines. If all goes as planned, the new FHA guidelines will help condo buyers and sellers navigate a pathway to increased homeownership and healthier communities.
News Release
FHFA Announces Principal Reduction Modification Program and Further Enhancements to NPL Sales Requirements
FOR IMMEDIATE RELEASE
4/14/2016
Washington, D.C. – The Federal Housing Finance Agency (FHFA) today announced that Fannie Mae and Freddie Mac will offer principal reduction to certain seriously delinquent, underwater borrowers who are still struggling in the aftermath of the financial crisis to help them avoid foreclosure and stay in their homes. The new Principal Reduction Modification program is a one-time offering for borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac and who meet specific eligibility criteria. The modification will be available to owner-occupant borrowers who are 90 days or more delinquent as of March 1, 2016, whose mortgages have an outstanding unpaid principal balance of $250,000 or less, and whose mark-to-market loan-to-value (MTMLTV) ratios exceed 115 percent. Other eligibility criteria apply (see attached Fact Sheet for eligibility criteria and key dates).
The program was approved under FHFA's statutory authority in the Emergency Economic Stabilization Act of 2008 "to implement a plan that seeks to maximize assistance for homeowners and … minimize foreclosures," including through a "reduction in loan principal," while minimizing losses for the Enterprises (12 USC 5220(b)) as well as other provisions of law.
FHFA expects that approximately 33,000 borrowers will be eligible for a Principal Reduction Modification. Servicers must solicit borrowers eligible for a Principal Reduction Modification no later than October 15, 2016.
FHFA also announced today that it has approved further enhancements to its requirements for Freddie Mac and Fannie Mae's sales of non-performing loans (NPLs). The new enhancements: 1) establish that NPL buyers must evaluate borrowers whose MTMLTV ratio exceeds 115 percent for modifications that include principal reduction and/or arrearage forgiveness; 2) forbid NPL buyers from unilaterally releasing liens and "walking away" from vacant properties; and, 3) establish more specific proprietary loan modification standards for NPL buyers.
The new enhancements draw on the experiences of Freddie Mac and Fannie Mae with NPL sales over the past year and are consistent with current practices of most NPL investors. They are designed to minimize foreclosures, help mitigate the potential for neighborhood blight and decay, and help improve loan modification success rates.
"The national housing market has significantly improved in recent years but there are still areas of the country where home values have not recovered and negative equity remains a real problem," said FHFA Director Melvin L. Watt. "The Principal Reduction Modification program we are announcing today, along with the changes we are making to our NPL sales guidelines, will allow an opportunity for delinquent, underwater borrowers in these areas to avoid foreclosure and save their homes," he said.
In announcing the Principal Reduction Modification program, Director Watt also said: "This plan will no doubt be viewed by some as too small and too late and viewed by others as too large and unnecessary. However, the plan is consistent with FHFA's statutory obligation to 'maximize assistance for homeowners' by providing some borrowers what could well be their final opportunity to avoid foreclosure. It is also consistent with our statutory obligation to provide this assistance in ways that we reasonably expect will not have adverse economic consequences for the Enterprises. By meeting both of these statutory obligations, the program satisfies my commitment to implement a principal reduction plan only if we could structure one that would be a 'win-win' for both borrowers and the Enterprises."
The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 11 Federal Home Loan Banks. These government-sponsored enterprises provide more than $5.7 trillion in funding for the U.S. mortgage markets and financial institutions. Additional information is available at www.FHFA.gov, on Twitter @FHFA, YouTube and LinkedIn.
Contacts:
Corinne Russell (202) 649-3032 / Stefanie Johnson (202) 649-3030
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