Today marks about ten years of HUD failing to provide FHA backed mortgages to specific condominium communities inadvertently creating a redlining style of discrimination. The current regulations passed nearly ten years ago for condominium FHA financing intended to reduce risk as a measure to help eliminate real estate catastrophes that in part brought about the great recession. Condominiums used to go through an initial approval process and once they were approved the approval did not expire and a process called spot approval was conducted for each condominium FHA mortgage application. By 2011 spot approvals had come to an end and all condominiums would need to go through the same rigorous approval process with a need to re-apply every two years.
I recall attending the Community Association Institute legal seminar in 2008 where a representative from FHA conducted a presentation in front of hundreds of attorneys specializing in condominium law. There was some doubt among the crowd regarding the logic behind the new regulations and there were a few attorneys that asked some tough questions. One question asked how a condominium has the legal authority to pay for the approval process when their governing documents may not support the expense. The FHA representative responded that he thought that the condominium should pay for the approval of the condominium as it was the right thing to do. This was an example of one of his responses that left me thinking that this individual had no idea what he was presenting and put little thought into the impact that these regulations will have on condominium communities. The economy had suffered greatly and many of us believed that drastic measures would need to be taken so we remained hopeful.
By 2011 all spot lending for condominiums had expired. Owners began to realize what it now meant as they no longer would be able to sell their condominiums without FHA financing. Since the recession the percentage of FHA mortgages across the broader market had increased drastically, however the condominium market had fallen behind. In 2001 condominiums made up nearly 8% of the FHA mortgage market and by 2017 it barely made up 2%. Contracts for condominium sales were falling through and frustrated owners were taking their anger out on their own boards for their inability to sell their homes. Conventional mortgages were demanding 25 to 40% down in order to provide a mortgage to condominiums that did not qualify for FHA financing. Many mortgage providers would not provide any form of conventional lending as they wished to conform to FHA standards regardless of whether or not it was an FHA mortgage being provided. Not only had FHA mortgages dropped, conventional lending availability became difficult to find.
Within the condominium market, a certain market of condominiums was harmed far greater than the rest. There were condominiums that were outside of the FHA market originally such as wealthy condominiums or vacation condominiums. Then there is a margin of condominiums that are able to achieve FHA qualification for a handful of reasons such as they were newer condominiums with more modern governing documents and also a result of being newer they tended to have a lower percentage of rentals. Typically these were suburban flight communities in areas of growth. Lastly were the older condominiums with older governing documents. Many of these are urban condominiums that would have a higher likelihood of higher percentages of rentals. As owners were not able to sell these condominiums, but still needed to relocate they were forced to rent out their condominiums. This exacerbated the situation by making the condominiums more difficult to qualify for FHA approval. It was a downward spiraling effect to these communities. This segment of condominium communities were also the segment that previously had the highest concentration of FHA mortgages. As a result, HUD failed its mission among this segment of communities.
The following is the statement on HUD’s website:
“HUD’s mission is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; build inclusive and sustainable communities free from discrimination, and transform the way HUD does business.”
These specific heavily affected communities include elderly that rely on FHA backed reverse mortgages, young families or single mothers venturing into homeownership for the first time in one of the most affordable markets, or the disabled that were looking for affordable single level living with maintenance provided. As a result of the pervasiveness of the harm being done to the condominium market, Congress took action in 2016 with hopes to correct this problem in the passing of the Housing Opportunity Through Modernization Act (HOTMA). It demanded upon HUD to take action to correct this deficiency among the condominium FHA program.
HOTMA: “(Sec. 301) This title amends the National Housing Act to require the FHA to modify its certification requirements for condominium mortgage insurance to make recertifications substantially less burdensome than original certifications. The FHA must consider lengthening the time between certifications for approve properties and allowing information to be updated rather than resubmitted. A HUD field office must make decisions regarding exemptions to current FHA commercial space requirements and must consider factors relating to the economy of the locality in which the project is located.”
Shortly after the passing of HOTMA, the executive branch cobbled together a new set of regulations to comply with this act and to attempt to alleviate the hardships placed on these communities. With the presidential election in November of 2016 this set of regulations was frozen so they could be reviewed to ensure they comply with the ideals of the new administration. In June of 2018 a bipartisan demand from 120 members of the House and 54 members of the senate asked HUD to comply with HOTMA specifically to alleviate this undue burden. The letter written on June 12, 2018, to Secretary Carson signed by 54 bipartisan senators states, “FHA’s current condominium rules place significant restrictions on the purchase and sale of condominiums, even though they are often the most affordable homeownership option for first-time buyers, small families, urban and older Americans. Importantly, condominiums also offer residents access to amenities, services, and public transportation that build stronger communities and promote sustainable homeownership.”
Year after year I receive frustrated phone calls from owners that are facing the difficulties this impossible process has placed on them. Many times I am the recipient of the anger from owners that don’t understand the nature of the situation as if I have control over it. Other times it’s from owners who understand but are desperate for a glimmer of hope and then there are others that work to exploit the situation. For one brief example, a mother called me once asking if there was hope on the horizon for FHA financing for her condominium. At this point I had already been telling owners for about three years that change was indeed on the horizon but by now I had grown to think that I was simply lying to anyone to suggest there was hope. She described to me that she was in her eighties and she had the condominium for her blind son. He had grown accustomed to living in the unit, however if she passes away and reform had not yet occurred then he would not be able to qualify to purchase the unit and would be forced to move.
There is another community that I would describe as one level living and it attracted owners that enjoyed that lifestyle such as elderly and disabled. It was an older community that faced hurdle after hurdle in its attempts to obtain FHA approval. Their governing documents were older and they did not take into consideration new technology and markets such as Airbnb. They were not aware of any short term rentals within the community but the documents did not prohibit short term rentals, therefore their FHA application was turned down.
The condominium FHA debacle in turn created possible discriminatory practices among the segment of condominium communities that could qualify. Some boards would seek to not obtain approval in order to produce an additional hurdle to keep out buyers that otherwise could only qualify with an FHA mortgage. Many of these same communities would pass amendments restricting rentals in order to maintain the needed owner occupancy for FHA approval. While this second part may not have the intent to discriminate the results statistically may be discriminatory as the likelihood of a tenant being a protected class greatly outweighs the likelihood of an owner being a protected class.
Veterans became an unanticipated victim of this poor policy. The Veterans Affairs office that offers mortgages will not offer mortgages in a community with rental restrictions. As more communities adopt the rental restrictions with the aim of achieving an ideal that FHA has presented, it also has spread into non-condominium communities, thus affecting Veteran Affair mortgage viability in a broader market.
In another community where the FHA debacle had already taken an excessive toll to the point that nearly half the community stopped paying dues, not because they could not afford them, but because as they are underwater in their homes there leaves little to no reason to continue to pay dues. In this community we held a special meeting to set the dues to double what they need to be in order to continue to maintain community services. Mind you that these community services continue to be provided to those that are not paying dues as a prior court ruling has stated that services cannot be discontinued if they result in risk of loss to life or property. In addition, all legal steps have been taken to pursue debt collection by some of the best attorneys in the industry. In the meeting two elderly retired African American women who live solely on their social security checks approved of the increase as their personal ethic demanded it of them. They fully realized that their younger capable neighbors are benefiting from them. This specific example brings me back to believing that HOTMA will exacerbate the damages already brought unto these communities. Section 301 of HOTMA, as stated above, gives HUD field offices the right to factor in the economy of the locale when determining approval. I have no doubt this community would be one that would be singled out to be denied approval. Its current economic status is specifically and solely the result of the HUD practices in regulating the FHA market. This community borders a community that I boast is the best managed community in all of central Virginia due to their very solid financial footing. This neighboring community is nearly identical in physical traits, however its specific legal definition allows for it to obtain FHA mortgages as it is a homeowner association rather than a condominium.
Consistently we have an outlook that methods and practices of the past on the whole are behind us and archaic concepts such as “redlining” are a thing of the past. Instead they are recreated, sometimes without intent, but recreated nonetheless in more obscure and complex patterns. With the current government shut down having no end in sight and an already excessive delay in correcting current policy coupled with poorly written legislation from Congress, there appears to be no hope in sight.