October 25, 2016 - Earlier this year, Condominium Associations were very hopeful when HR 3700 was signed into law. Many were looking for relief on the 50% owner occupancy requirement, transfer fees, and leniency on commercial/nonresidential floor space.
The specifics in HR 3700 stated that HUD had 90 days to respond to the changes. Yesterday, HUD released its implementation action via the Federal Register. Although the response is a bit lackluster, it appears as though we will have direct guidance regarding Owner Occupancy restrictions in the near future. All other changes from HR 3700, including transfer fees have yet to be sorted out and we don't have a timeframe on a response.
This is HUD's official response regarding the changes:
Section 301. Modification of FHA Requirements for Mortgage Insurance for Condominiums
Section 301 mandates several changes to FHA's mortgage insurance for condominiums, including changes to requirements on project recertification, exceptions to the percentage of floor space that may be used for nonresidential or commercial purposes, private transfer fee covenants, and the minimum required percentage of units that must be owner occupied.
Implementation action: Some of these changes must be done by regulations, while the revision to the owner occupancy percentage may be done by rulemaking or an administrative document. HUD issued a proposed rule to implement provisions on all these subjects other than transfer fees, and including general parameters on owner occupancy, on September 28, 2016, at 81 FR 66565. In the near future, HUD will be issuing a Mortgagee Letter to establish the specific owner occupancy percentage. For other provisions of section 301, HUD is considering the appropriate implementation action.
Proposed Rule FR-5715-P-01, Project Approval for Single-Family Condominiums
Although HR 3700 garnered more press, the proposed rule released by HUD on September 28th, has potential to make even more changes. The rule is still in comment period, however we believe it gives us a good idea of the direction HUD is going in.
These are the highlights:
- Single-Unit Approvals
- Owner-Occupancy Percentage
- Extension of the project approval period
Single Unit Approvals
Current FHA Guidelines: Single-Unit Approvals are not allowed. At this time the entire Condominium Project must be FHA Certified.
Proposed Rule: Single-Unit Approvals would be allowed based on a subset of criteria. The criteria have not yet been released. There would be a limit on the number of mortgages allowed within a single condominium project. This limit could potentially vary upon notice.
FHA Review Opinion: This could dramatically change financing options for owners and buyers. However, until the criteria are released and the process is announced it is too early to tell how much of an impact this will have. We have been told it is not the "spot-approval process of the past". Also, the last time there was a spot approval process we were still operating under the old guidelines and there were over 50,000 FHA Approved condo projects. Most real estate professionals have forgotten this and believe this new process will ease the FHA Certification process greatly. We anticipate a much more stringent review process and increased oversight in comparison to the previous spot-approvals.
Current FHA Requirement: 50% of units must be owner occupied.
Proposed Rule: HUD is proposing a range between 25 and 75%, and HUD would be able to vary the acceptable amount by releasing a "notice". This is seen as favorable because it allows HUD to be flexible and adjust the percentages based on current market statistics.
FHA Review Opinion: Lowering the owner occupancy percentage would allow more communities to meet this requirement however any increase over 50% would have a detrimental effect. Also, this large of a range will make it very difficult for Condo Projects to plan effectively for the future and maintain eligibility. We are adamant that any requirement over 50% would have a terrible impact.
Extension of the project approval period
Current FHA Requirement: FHA Certification is good for a period of 2 years.
Proposed Rule: HUD is seeking comment on extending the Certification time frame from 2 to 3 years.
FHA Review Opinion: This has the potential to help tremendously. Extending the certification period will give more value in applying and the recertification process would become less burdensome. This would result in more Condominium Projects being approved at any given time.
There are estimated to be over 100,000 condo projects in the United States, and typically between 9 and 12% are ever FHA Approved. This is negatively impacting condo owners, potential buyers, and the real estate market as a whole. The importance of this is reflected in the efforts put forth by CAI, NAR, and other trade organizations. HUD is making efforts at relaxing the guidelines to allow more condo projects to become certified, however the industry as a whole needs to make a joint effort for any major improvements to be achieved.