In a rare, unanimous, and bipartisan vote of 427-0, the U.S. House of Representatives approved the Housing Opportunity through Modernization Act ("the Act"). On July 29, 2016, President Obama signed it into law. The Act requires the Federal Housing Administration (FHA) to ease up on burdensome restrictions on condominium associations, in hopes of increasing the number of communities eligible to sell to homebuyers who qualify for FHA-insured financing.
The FHA does not originate mortgage loans, but it insures them against default. An FHA-insured loan is a mortgage loan that meets all FHA credit and property standards, is originated by an FHA-approved lender, and is insured by FHA. Condominiums must be certified in order to participate in the FHA program. FHA condominium certification is the process of verifying that a condominium association meets all FHA legal, financial, operational and property requirements. A borrower may not use an FHA-insured mortgage to purchase a condominium unit unless the condominium association has been certified by FHA and the association is in full compliance with all FHA program requirements at the time of purchase.
FHA-insured loans have long been an attractive option for first-time homebuyers and seniors in need of reverse mortgages, because they offer low down payments, more favorable interest rates, and more leniency with regard to credit scores and debt-to-income ratios. Condominiums are often seen as an affordable option when looking to purchase a new home.
The Act directs the FHA to modify certification requirements, so that re-certification is "substantially less burdensome" than certification. The FHA may consider lengthening the time between re-certifications and require updates to information rather than resubmission. Once the process is simplified, more communities can get certified and stay certified, making it easier to sell existing properties to FHA qualified buyers.
The Act also reduces the minimum owner-occupancy ratio from 50% to 35%. The owner-occupancy ratio is the ratio of owners living in a community compared to the overall number of units. By lowering the ratio, a substantial number of developments previously disqualified due to having a greater proportion of rented units will be eligible to reenter the FHA program.
A high number of renters in a community has long been considered too risky for other homeowners, as renters are less likely to abide by the condo rules regarding noise and upkeep. However, the change increases the pool of eligible homebuyers by making it possible to sell properties to FHA qualified buyers. The alternative is often that the homeowners have to keep the property on the market longer or are forced to accept a lower offer from a smaller pool of homebuyers.
The Act directs the FHA to follow the lead of Fannie Mae and Freddie Mac, by allowing Associations to charge transfer fees. In the past, many communities were prevented from accepting FHA financing because they charged nominal transfer fees. These fees typically support association activities and benefit all residents of the community. This change has the potential to increase the number of communities eligible to participate in the FHA program, without having a significant effect on current homeowners.
Lastly, the Act eliminates a bright line rule limiting the ratio of commercial to residential units in a community. This change provides greater flexibility to mixed-use condominiums in areas where a higher ratio of commercial to residential property makes prudent economic sense. Urban communities that are more likely to have a high commercial to residential unit ratio than their suburban counterparts have the potential to benefit greatly from this change.
Tastes are also changing for many first time homebuyers. New homebuyers entering the housing market are looking for smaller, more eco-friendly housing, close to work, with flexible transportation options. The Act removes the bright line rule and directs the agency to look at the overall market in an area when considering the ratio of commercial to residential units in a community.
Time will tell whether the changes made possible by the Housing Opportunity through Modernization Act will be enough to revive FHA's dampened condominium program. Speaking on behalf of the Community Association Institute in response to the passage of the Act, Dawn Bauman, Senior Vice President of Government Affairs, concluded "It's time to roll up our sleeves and work in the same collaborative fashion that produced H.R. 3700 to ensure this law is fully implemented."
If you are a member of a community association and would like to enroll or re-enroll your community in the FHA program under the new rules, the attorneys at Nagle & Zaller are prepared to assist you with that process.