FHA reforms don’t rescue condo buyers

Kenneth R. Harney on Nov 20, 2015

WASHINGTON – If you’re a first-time buyer with a moderate income and not much cash for a down payment on a condo, the availability of Federal Housing Administration (FHA) financing is a big deal. Not only do you need just a 3.5-percent down payment, but FHA is also far more flexible on credit compared with other financing sources. With a sub-par FICO score and a high debt-to-income ratio, banks and big investors such as Fannie Mae don’t want to know you. FHA welcomes you with open arms.

The challenge for condo purchasers in the past several years, however, has been finding a condo project that is certified by FHA as qualified for mortgages on individual units. Because of controversial eligibility rules imposed by the agency in recent years, the number of certified projects has plunged, with barely 20 percent of previously eligible condo communities now able to offer FHA loans on units, according to real-estate industry estimates.

As a result, FHA’s once pivotal role in helping first-time buyers and others purchase moderate-cost condos has shrunk from 80,000 and 90,000 mortgages per year during the past decade and a half to 22,800 last year. Through August of this year, condos represented barely 2.8 percent of total FHA loan volume. The agency prohibits “spot loans” made on single units in a project; if the whole community isn’t certified, nobody gets FHA financing, including existing residents who need to refinance their loans or obtain a reverse mortgage.

All of this has provoked bipartisan criticism on Capitol Hill, particularly among advocates for FHA’s traditional customer base – minority buyers, first-timers and the non-wealthy. Faced with a congressional legislative proposal mandating reforms of its condo rules, last week FHA responded. At a convention of the National Association of Realtors in San Diego, FHA’s top official, Edward L. Golding, said the agency is simplifying some of its condo certification procedures, easing restrictions on condo association insurance and making a technical change to its requirements on non-occupant residency in projects. The president of NAR, C`hris Polychron, called the changes “a win and a tremendous first step in the right direction.”

But will they really matter to you as a potential buyer searching for an eligible condo project or a unit owner looking to sell or refinance? Maybe. But the reforms FHA outlined don’t address the key reasons why so many condo associations no longer are certified and why so many first-time buyers and minorities have been shut out.

In fact, one national expert on the FHA condo program, Christopher L. Gardner, managing member of consulting firm FHA Pros, which assists homeowner associations through the thicket of certification rules, said the changes amount to “a lot of sizzle and little steak.” Dawn Bauman, a senior vice president for the Community Associations Institute, which represents more than 33,500 condo and homeowner associations and managers nationwide, said that while some of the changes look “helpful,” there’s “a lot of hype” surrounding the announcement and “a lot more work to do.”

Condo consultant Natalie Stewart, president of FHA Review in Orange County, California, told me that given the modest scope of the changes, “I’m shocked that they bothered to come out with this at all.”

What’s not addressed that would really impact individual buyers and sellers quickly-

- Spot loans. In past years, FHA permitted lenders to make loans on single units in non-certified communities with certain restrictions, but no longer. Since the vast majority of previously eligible condo projects around the country have opted out of the FHA program, the modest simplifications to the certification process likely won’t be enough to attract many of them back. Last week’s announcement did not even mention spot loans.

- Transfer fee restrictions. In some parts of the country, condo associations collect a small fee – a contribution toward capital expenses and repairs of community facilities – whenever a unit sells. FHA objects to these as restrictions on the free transferability of properties, and refuses to approve them. As a consequence, some large associations – one in southern California with 7,000 homes – no longer are eligible for FHA financing. The new changes are silent on the subject.

- Rigid rules on budgets, reserve, lease approvals and limits on commercial space.

Bottom line- If you’re counting on FHA to help finance your condo purchase, it’s possible the new changes will convince more associations to seek eligibility. But as consultant Gardner said, there’s more sizzle here than red meat.

Appraisal ‘adjustments’ can cause trouble

Kenneth R. Harney on Nov 6, 2015

WASHINGTON – Whether you’re a home buyer, seller or looking to refinance, you probably know the crucial importance of appraisals- They can limit the amount of mortgage money you’re allowed to borrow, delay your closing or even totally mess up what you thought was a done deal.

According to survey research provided by the National Association of Realtors, more than one out of five home real estate contracts gets delayed before closing because of disagreements or problems connected with the appraisal. Eleven percent of sales contracts that explode before final signing involve appraisal issues.

That’s a lot. Say you’ve found a buyer for your house who’ll pay you $400,000. Suddenly an appraiser says it’s really worth $365,000, based on analysis of “comparable” properties sold recently in the area. Now your buyer balks and threatens to pull the plug if you don’t slash the price. You and your listing agent challenge the appraisal and demand to see what sort of comparable sales and other calculations were used to come up with a value $35,000 below what a buyer was prepared to pay.

Where to look? A massive, first of its kind study of 1.3 million individual appraisal reports from 2012 through this year conducted by real estate analytics firm CoreLogic offers a suggestion- In the so-called “adjustments” in appraisals that involve relatively subjective estimations – the appraiser’s opinions on the overall “quality” level of your house, its “condition,” “location” and “view” – rather than more objectively determinable items such as living space square footage, lot size, numbers of baths and bedrooms, etc.

The adjustments are made to the recorded sales prices of the houses the appraiser chooses as “comparables” to get a more accurate sense of the value of the house being sold or refinanced. Say your home has three bedrooms but a nearly identical house selected as a comparable has four. The appraiser is supposed to determine the market value of that extra bedroom and make an appropriate adjustment to the value of your house.

Adjustments are made in 99.8 percent of all appraisals, according to the CoreLogic study. The most frequent adjustments involve objective features of houses – living area, rooms, car storage, porch and deck were all adjusted in more than 50 percent of the 1.3 million appraisals, according to CoreLogic. As a general rule, the adjustments on objective features were not large in dollar terms. For example, “room” adjustments were made in nearly three quarters of all appraisals but averaged only $2,246, and did not affect the final appraised value dramatically.

Adjustments involving more subjective matters – the overall “quality” or “condition” of the house – were less common but typically triggered much bigger dollar changes. The average “quality” rating adjustment was nearly $15,000, which is more than enough to complicate a home sale. But some subjective adjustments on “view” or “location” in high cost homes ran into the hundreds of thousands or even millions of dollars.

Jon Wierks, senior director of decision analytics for CoreLogic told me in an interview that items such as “condition,” view” and “location” can be “super subjective” at any price level and especially challenging for appraisers new to the field or with limited knowledge of local market trends. In one adjustment in the appraisal study, he said, a property in a neighborhood of expensive homes got a $3 million downward adjustment solely on “view.” In other cases, researchers saw adjustments of $4 million and $15 million on location issues. Did these adjustments set off battles between sellers and buyers? The CoreLogic study didn’t get into that but it wouldn’t be surprising.

Gary Crabtree, an appraiser in Bakersfield, California, told me he recently has seen “view” adjustments ranging from $100,000 to $140,000 within a golf course community and he made a $150,000 adjustment on a large luxury home because of its unfavorable location. The most accurate adjustments are based on hard local market statistical data, Crabtree says, but when they are not, valuations can end up distorted, prompting delays or blowups.

Research released last week by Platinum Data Solutions, which reviewed 300,000 appraisals made between July and September, found that fully 39 percent of “quality” or “condition” ratings conflicted with previous ratings on the same property. That inevitably invites controversy.

Bottom line- If your appraisal doesn’t square with the contract or threatens the deal, take a hard look at the “adjustments” made inside the appraisal on subjective factors such as condition and quality.