MBA Offers Recommendations to FHA Condominium Programs

The Mortgage Bankers Association, in a letter yesterday to HUD, offered a series of recommendations to the department’s proposed revisions to the FHA condominium programs.

The program enables FHA-approved lenders to extend insured mortgage financing to one-family units in multifamily projects as affordable options for first time- and low-to-moderate income homebuyers.

“MBA supports FHA’s efforts to promote safe and sustainable financing for condominium loans and to increase the efficiency of current processes, such as the streamlining of private transfer fees and the expansion of the condominium project recertification period,” wrote MBA Senior Vice President for Public Policy and Industry Relations Stephen O’Connor. “MBA supports the intent of FHA’s proposed rule on condominiums to ensure financial soundness and project viability while maintaining flexibility to retain the ability to be responsive to the changing market.”

MBA worked with a cross-section of diverse lenders to identify the following recommendations to further improve FHA’s condominium program. “Enhancing this important program will encourage more lenders to participate in FHA condominium lending and will ensure direct benefits to first-time and low-to-moderate income homebuyers,” O’Connor said.

Private Transfer Fees
Under a Federal Housing Finance Agency final rule in July 2012, Fannie Mae and Freddie Mac would be allowed to accept mortgages on properties subject to private transfer fee covenants so long as they provided a direct benefit to the encumbered property. MBA is supportive of this mandate, believing that immediate adoption of the FHFA rule will provide consistent guidelines for the industry and will allow for an expansion of eligible projects, so long as the private transfer fees are to the benefit of the borrower. “MBA believes that this change will create clearer and consistent guidelines across agencies, making it easier for lenders and FHA to serve the FHA borrower,” MBA said.

Application for Condominium Project Approval and Renewal of Approval
MBA strongly supports FHA’s proposal to extend the approval period for a condominium project from two years to three years. To increase clarity around this new requirement, MBA recommends HUD further memorialize the lenders’ obligation to report known changes in circumstance through explicit language in the final rule. “A clear provision of lender reporting requirements and reporting processes will contribute to decreased risks for both lenders and HUD,” MBA said.

FHA proposes to permit only legal phasing, while individual phases must contain a sufficient number of units to be separately sustainable as required by HUD so that the insurance fund is not placed at undue risk. MBA said it has significant concerns regarding this new proposal due to the potential implications that it would have on new construction projects and FHA borrowers seeking units in these buildings.

“MBA believes that FHA’s current phasing proposal would pose substantial difficulties for both builders and lenders in new construction projects, resulting in substantial closing delays,” the letter said. “Without pre-approvals that are currently issued for ‘under-construction’ or proposed construction projects, a lender would not be able to order a case number until a project is approved, subsequently delaying the processing of a loan application and resulting in significant closing delays of up to 60 days. This will ultimately limit the choices for low-to-moderate income borrowers, leaving them at a disadvantage if they are seeking new construction units.”

MBA recommended that the current phasing guidelines remain as-is, specifically for new construction projects to ensure optionality and choice for the FHA borrower. MBA also recommended FHA limit the need for contiguous criteria to only vertical buildings, as requirements for builders to construct buildings in a specific order may limit the ability of a builder to make their projects available to borrowers in a timely manner.

Complete and Ready for Occupancy Requirement
MBA also expressed concern that HUD’s additional proposal to require that a project or legal phase be “complete and ready for occupancy,” including the completion of the infrastructure of the project or legal phase, would represent a dramatic change in building plans for new construction projects. “In many instances, this proposal would significantly impact current industry practices in place for the installation of building amenities and the timing of project eligibility and approval,” MBA said.

MBA recommended HUD allow lenders to continue with the current practice of approving proposed or under construction projects, despite the possible need for additional environmental reviews, and maintain its current guidelines. “Should HUD remain concerned regarding risk management issues related to projects with amenities in place, MBA recommends that HUD require a bond or letter of credit from the builder to assure completion,” MBA said.

Direct Endorsement Lender Review and Approval Process
MBA offered the following recommendations on codification of DELRAP:

–Indicia of appropriate experience. FHA’s proposal would require staff with “at least one year of experience in underwriting mortgages on condominiums and/or condominium project approval” to approve condominium loans. However, without further guidance to assist lenders in identifying the qualifications of reviewers through the establishment of a formal documentation process for DELRAP lenders, MBA recommended FHA maintain its current requirement. MBA believes that lenders with DELRAP authority should be able to determine the appropriate experience criteria for their staff and be provided with the discretion to make staff qualification determinations,” MBA said.

–Conditional DELRAP Authority. MBA requested further clarification on necessary procedures for the submission of all recommended Condominium Project approvals, denials and re-certifications. To streamline this process, MBA recommended establishment of one centralized resource and staff to manage the conditional DELRAP authority.

Commercial Space/Non-Residential Space
MBA supports FHA’s proposal to adjust and/or expand commercial space requirements for FHA approved condominium projects in response to the industry’s feedback on the need for additional flexibility for non-residential space. MBA recommended the commercial space requirement be set between 25-50 percent, with specific guidelines to allow exceptions for projects with up to 60 percent commercial space. MBA also said special consideration is needed when a project seeks to use more than 50 percent of a property’s total floor area for commercial space due to the potential impacts of this expanded presence on the characteristics of a residential project. MBA also recommended FHA clarify that this requirement is not a minimum, but an allowable maximum for the addition of commercial space as well as the frequency with which FHA will reexamine the commercial space requirement, how much notice will be provided to lenders when a change is made, and what criteria will be used to determine recalculations., MBA also suggested FHA further define the items that may contribute to commercial space to ensure that lenders understand what features will fall into this category to aid in the completion of accurate commercial space calculations.

Acceptable Minimum Levels of Owner-Occupancy
MBA strongly supports FHA’s position that owner occupants serve to stabilize the financial viability of a project and are more incentivized to cooperate with other unit owners to ensure successful operation of a project. MBA supports a minimum level of owner-occupancy range between 25 and 50 percent, while certain exceptions could be made for lower percentages, or for extending the range to 75 percent, as proposed by. MBA also requests additional clarity regarding the frequency with which it will reexamine the owner-occupancy level, and what criteria will be used to determine recalculations.

Additionally, MBA recommended FHA establish a revised owner-occupancy calculation based on the number of the minimum allowable investment units rather than based on a subdivision of classifications for owner-occupied units, investor units, vacation homes, etc. “This revised grouping would make it easier for lenders to distinguish and track the number of primary, secondary and investor held units,” MBA said.

Single-Unit Approvals
MBA is concerned that FHA’s efforts to reintroduce parameters for single-unit approvals do not have enough systemic safeguards in place to ensure that these approvals are limited to already existing projects and to minimize misuse of this program. MBA recommended FHA implement a limited review process for single-unit approvals and a screen within FHA Connection to collect data for FHA on spot approvals to help FHA monitor and manage these risks.

Acceptable Maximum Percentages of Units with FHA-insured Mortgages
MBA said additional clarity is needed on the frequency with which HUD will adjust the allowable maximum and minimum percentages and the amount of notice that lenders will be given prior to a change in the range. MBA recommended FHA maintain its current guidelines to allow for 50 percent of the total number of units in a project with some leniency to allow for potential cancellations.