The Return of FHA Spot Condo Loans?

elenathewise_5This past weekend, I was mentioned in a Ken Harney article (shameless self-promotion). He called me two weeks ago to revisit a topic that we had earlier discussed: the possible return of FHA Spot Loans for Condominiums.

Following the article, I was contacted by a colleague who asked me if I thought that spot loans would return.  Because if they do, FHA Condo Approvals may not be as valuable to associations as they are now.  This could pose a threat to our livelihood.

I explained that the spot loan program was eliminated due in part to abuse in the mortgage industry.  It allowed for single loans in condominiums that were not on the FHA approved condominiums list.  To complete the loan processing, a single questionnaire about the project was completed and if all of the answers met FHA’s criteria, the loan would be allowed.

Problem #1 is that there were really no controls in place regarding who could complete the questionnaire.  Even the loan officer (who had a vested interest in the loan closing) could complete the form.  This, in and of itself, opens the door to fraud.

Problem #2 is the lack of ability to track how many FHA loans there are within the condominium projects themselves.  When a condominium is approved with FHA, it is given a condo ID number.  Condo ID numbers were not issued when a spot loan was approved in a condominium.

FHA tracks how many of its loans encumber the units in a condominium project which cannot exceed 50% (*with exceptions).  However, when spot loans were used, there was no way to track how many FHA loans existed in these condominiums because there was no condo ID.

There is a lot of pressure on FHA for the return of spot loans.  AARP is one of most vocal organizations due to the inability of retirees to obtain reverse mortgages for condominium units which are not on the Approved Condos List.  For many retirees, a reverse mortgage may be the only way in which they can afford to stay in their home/condo unit.

In the Harney article, he mentions my attendance at a recent condo Board meeting.  One topic at the meeting was FHA condo approval.  This was brought to the Board’s attention by a couple who is trying to get a reverse mortgage but can’t because the condominium is not approved with FHA.  As it turns out, the condominium is not approvable at this time because it does not make the required contribution to an account dedicated to future capital improvements.

Having the ability to acquire a spot loan in cases like these would help this couple.

kentohHowever, the question then becomes, if FHA were to allow a loan here (in a condominium which does not meet its criteria), why not allow them in all condominiums who do not meet this requirement?  Why not allow them in condominiums that don’t meet other requirements?  Why have standards at all?

In addition, by what standards would they allow for spot approvals?  Would something similar to a full approval be required?  Or would it allow for lower standards than a typical condo project approval but only allow a couple per condominium?  How would they track them?

These are all questions that FHA would have to answer prior to making a decision to bring back spot loans.

I do believe that we will someday see the return of spot loans, but I do not think it will be soon.  Besides having to answer these questions, it will have to go through the process of law to occur.  That, alone, takes quite a while as we know.

Even if they do return, I don’t see much impact on our business primarily because FHA will have to track spot loans and most likely won’t allow more than a handful in a condominium.  Secondly, there were more than 50,000 condominiums on FHA’s approved condos list when the spot loan program existed.

Related Articles:

Will FHA Spot Loans Return?

FHA May Bring Back Spot Loans

Unleashing the Red Hot Condo Market


Top Photo Credit: (c) Can Stock Photo / elenathewise

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

Ken Harney’s Beating On FHA Again

This past weekend, I was mentioned in a Ken Harney article.  He called me two weeks ago to revisit a topic that we had discussed in April: the possible return of FHA Spot Loans for Condominiums.

While I am honored that he chose to cite me in the article, I don’t believe that the paragraph is entirely accurate.  The story about the 80-year old couple is true.  They cannot obtain a reverse mortgage primarily because the association is not contributing the statutory 10% to the reserve account annually.  This renders the condominium ineligible for an FHA condominium project approval.

However, it is important to make two key points about this:

  • Conventional loan programs of Fannie Mae also require that an annual 10% contribution to the reserve account is made.  So, FHA is not alone in this requirement.
  • According to reserve studies that I have reviewed, a 10% contribution to reserves is lower (sometimes far lower) than is typically recommended by the reserve analyst.  Thus, this requirement is not excessive.

Fortunately, for this couple, the Board and the Association are interested in obtaining an FHA Condo Approval.  This is why I was asked to attend the meeting.  They wanted to know what they needed to do in order to qualify for an approval as quickly as possible.

This has not been the case with many other associations with whom I have spoken which I believe is the real problem behind why less than 7% of condominiums are approved with FHA, nationally (according to Harney’s article).

Many associations aren’t interested in obtaining an FHA Condo Approval because they believe it will let in a certain segment of the population.  This is based on myths that FHA buyers are low-income, government-subsidized, bad-credit borrowers — none of which is true.  FHA buyers have to qualify for the loans on their own merit and are not provided subsidies to purchase from FHA.

What they don’t know is that FHA has better performance numbers than those of conventional/Fannie Mae borrowers.

I heard it many times at the CAI New Jersey Expo over the weekend.  They saw the sign “FHA/VA Condo Approval Specialists” and immediately said “FHA?  No thank you.”  Thankfully, I had my data sheet on FHA loan performance to at least educate them a little bit.  It’s frustrating to me that Board members are shutting out an estimated 40% of the buyer pool based on inaccurate myths.

Another point regarding Harney’s comment about the lack of FHA-approved condos is that many of the nation’s 150,000 condominiums wouldn’t benefit from an FHA approval.  This is simply because the unit values are far above the maximum mortgage loan limits set by FHA.

Does it make sense for a condominium association to get approved with FHA when its unit values are $700,000 when the max FHA loan limit is $300,000?  It may not impact the sales of the units at all.

I think that if Harney wishes to speak about the lack of condominiums on the FHA Approved Condominiums List, he should examine the reluctance of associations to obtain the approval.  Being a talented writer, he could certainly help to dispel the myths of FHA borrowers better than this author.

Top Photo Credit: (c) Can Stock Photo / watamyr