Board Doesn’t Want HUD to Affect Operation of Condominium

iosphereWe have been working with a lovely couple in Connecticut to get their condominium approved with FHA so that they can obtain a reverse mortgage.  The Board has been reluctant to provide the necessary information to us and it recently surfaced as to why this is.  They have concerns that once the condominium is approved by FHA, the Federal Government will have the power to dictate how the condominium is run.

The couple asked us to compose an email that they could present to the Board that might allay the fears of the members.   The content of this email follows…

Thank you for your contact today.  I can understand the Board’s apprehension regarding getting your condominium approved for FHA loans but I can assure you that this is due to misunderstanding.

The Federal Housing Administration (FHA) is housed within the U.S. Department of Housing and Urban Development (HUD).  HUD has many departments within it including special help for folks with low to moderate income levels.  It provides Section 8 housing for these folks.  However, FHA is not part of this program and borrowers who use FHA loans are not subsidized by the government and have to qualify for the payment of the loan based on their merits.  The standards for FHA loans are nearly the same as for the so-called “conventional” loans of Fannie Mae and Freddie Mac.  FHA is also the sole provider of Reverse Mortgages, which you are now seeking.

FHA is not a lender; rather, it is a mortgage insurer.  When a borrower contributes less than 20% to a purchase of a home, the lender requires some sort of mortgage insurance.  In the conventional world of Fannie Mae and Freddie Mac, the insurance for these loans is provided by third party insurance companies such as MGIC and PMI.  When a borrower uses an FHA loan, FHA insures the loan to the lender in the case of borrower default.  If the lender has to foreclose on the loan and acquires title to the property, the title then transfers to the Secretary of HUD and the FHA insurance fund will pay the lender for any monetary losses that the lender suffered as a result of the foreclosure.

For condominiums, FHA has a requirement that the entire condominium project first obtain approval from HUD to verify that it meets the requirements of the Federal Code of Regulations that established the guidelines for FHA loans and acceptable property types (24 CFR 203).  HUD Mortgagee Letter 09-46b established the requirement for project approval and eliminated the “Spot Loan Approval” process.  Prior to 2/1/2010, FHA would allow loans in condominium projects that were not on the approved list on a “spot loan” basis.  Now all condominiums must be on the FHA Approved Condominiums List if FHA loans are to be allowed to encumber any units in the project.

ArcadyObtaining an FHA Project Approval is what allows unit owners and unit purchasers to finance their units with FHA loans.  It is a “stamp of approval” that the condominium project meets the minimum requirements.  Once approved, neither HUD nor FHA has any ability to control what happens within the community.  If the condominium decides to make rules, amend its legal documents or make other internal changes that violate HUD’s guidelines, the community would lose its approval and no longer qualify for FHA loans.  Neither FHA nor HUD would have any power to block the association’s decisions to do so.

If a unit is encumbered with FHA financing, FHA has no control over the goings on of the condominium unless the borrower defaults and the title of the unit transfers to the Secretary of HUD, as mentioned above.  If this were to happen, HUD would then become a UNIT OWNER and potentially have voting rights within the condominium but subject to the limitations a laid out in the Declaration and By-laws.  HUD would have no powers beyond that of a UNIT OWNER and would have the percentage of ownership interest in the common elements as dictated by the legal governing documents.

Many believe that FHA loans are for low- to moderate-income buyers (as mentioned above) which is a myth.  FHA borrowers must meet underwriting criteria that are nearly as strict as conventional loans.  The benefit of using an FHA is the ability for a low downpayment of 3.5%.  This would not affect the condominium because of the property values of the units.  I say this because the maximum FHA loan amount in your county is $601,450.  This would mean that for a buyer to purchase a $1,000,000 unit in your condominium, he/she would have to make a $398,550 down payment to use an FHA loan.

The reason we are working diligently to get the condominium approved with FHA is to allow the availability for FHA Reverse Mortgages to those who already reside in the community.  An FHA Reverse Mortgage will allow the unit owner to utilize the equity in his/her unit and will not require the owner to make monthly payments.  A great facet of Reverse Mortgages is that if the unit faces a negative equity position, FHA, not the owner’s heirs or the condominium, will make up the deficiency with the lender.

I hope that this provides some insight as to FHA, HUD and the project approval that we are seeking for your condominium.

Please let me know if you have any further questions.

Hopefully this will clear things up for the Board!

 

Top Photo Credit: (c) freedigitalphotos.net / iosphere

Lower Photo Credit: (c) Can Stock Photo / arcady

FHA Announces Reduction in Monthly Mortgage Insurance

stuartmiles (14)On Friday, December 9, 2015, HUD released Mortgagee Letter 15-01 which announced a 0.50% (50 bps) reduction of the FHA monthly mortgage insurance on most forward mortgages with terms greater than 15 years.  This comes on the heels of months of lobbying by housing groups such as the National Association of RealtorsⓇ and the National Association of Mortgage Brokers.

Since 2010, FHA has been steadily increasing the monthly mortgage insurance rates to provide for the stability of the FHA Mortgage Insurance Fund.  The Fund is what allows FHA to insure lenders against losses due to foreclosure; loss of the Fund means the loss of the FHA mortgage loan program.  When foreclosure rates increased during the recession, FHA began to realize losses and determined the need to increase the premiums to raise the balance of the Fund.

More recently, housing groups began to argue that now that the Fund is flush with cash, FHA should lower the monthly mortgage insurance premiums to encourage greater usage of the FHA loan program.  The lowering of the monthly mortgage insurance premiums (MIP) makes FHA more competitive in the marketplace (when compared to the mortgage insurance rates of Fannie Mae).

The chart below illustrates the changes in the rates that will be effective on and after January 26, 2015.

Term >15 Years
Base Loan Amount LTV Previous MIP New MIP
≤ $625,500 ≤ 95.00% 130 bps 80 bps
≤ $625,500 > 95.00% 135 bps 85 bps
> $625,500 ≤ 95.00% 150 bps 100 bps
> $625,500 > 95.00% 155 bps 105 bps
Term ≤ 15 Years
≤ $625,500 ≤ 90.00% 45 bps 45 bps
≤ $625,500 > 90.00% 70 bps 70 bps
> $625,500 ≤ 90.00% 70 bps 70 bps
> $625,500 > 90.00% 95 bps 95 bps

The rate reduction does not apply to single-family forward streamline refinance transactions that closed on or before May 31, 2009 or to Section 247 mortgages on Hawaiian Homelands.

A basis point (or bp) is 1/100th of a percent.  For a loan amount of less than $625,500 and a loan to value (LTV) greater than 95%, the mortgage insurance factor is 85 bps, or .85% of the loan amount.  This factor is applied to the outstanding balance of the loan and then divided by twelve (12) to calculate the monthly mortgage insurance premium.

By comparison, the monthly mortgage insurance rates for a Fannie Mae loan of $200,000, 95.01% LTV and borrower credit score of 700 is 131 bps.  For the same loan and borrower but for 95% LTV, the mortgage insurance factor is 89 bps.

While the mortgage insurance for an FHA is for “the life of the loan”, I believe that the lowered MIP will encourage borrowers to see FHA as a viable option for purchasing and refinancing.  I placed “life of the loan” in quotes because the average life of an FHA loan is around 8 years.  Lifetime FHA MIP is a red herring in my opinion.

I did find the second half of the Mortgagee Letter interesting in that FHA is temporarily allowing the canceling of Case Numbers that were assigned to loans that have not yet closed.  This will allow lenders to cancel the Case Numbers (and therefore the loan) and obtain a new case number after 1/26/15 to allow borrowers to take advantage of the new, lower MIP rates.

In order to take advantage of the new MIP rates, lenders must first cancel the existing Case Number before it submits to acquire a new Case Number.  Cancellation requests may begin on 1/15/2015 and must be submitted no later than 11:59pm, Eastern, on February 26, 2015.

This is encouraging news for condominiums with unit values in FHA’s “sweet spot” of $100,000 to $250,000.  Until this announcement, FHA’s MIP was very expensive and made buying condominium units out of many buyers’ abilities.  The lowered MIP rates will allow more borrowers to qualify to purchase units.

Image courtesy of Stuart Miles/freedigitalphotos.net