New bill brings good news for condo buyers

Kenneth R. Harney on Jul 29, 2016

WASHINGTON – Congressional Democrats and Republicans haven’t agreed on much lately, but they’re together on one issue that affects condominium buyers and sellers across the country- The Federal Housing Administration (FHA) has bungled its condo finance program.

In a rare moment of bipartisanship before heading home for the summer, the Senate unanimously passed legislation that will require the FHA to lighten up on its condo financing regulations and make low down payment FHA loans more available to the people they are supposed to serve – moderate-income buyers, many of them minorities and first-time purchasers, who turn to condominiums as their most affordable option. The vote in the Senate followed a 427-0 vote in the House earlier this session.

Passage of the legislation came after several years of complaints by housing, community association and other groups about FHA’s overly strict requirements. Critics pointed out that FHA once was the go-to source of condo financing for first-time buyers, but since 2010 its role has shrunk drastically. FHA helped finance 80,000 to 90,000 condo mortgages a year during the previous decade and a half, but more recently production has dwindled to barely a quarter of that volume. FHA condo lending in the first three months of this year plunged by 8.6 percent from the previous quarter, according to Inside Mortgage Finance, a trade publication. In the final quarter of last year, volume declined by 20.3 percent from the third quarter.

The agency’s restrictions on condo community eligibility for financing became so onerous – requiring complicated re-certifications of entire developments every two years – that thousands of condo associations abandoned the program. According to the Community Associations Institute, fewer than 14,000 of the 152,000 condo associations in the U.S. are now eligible for FHA loans. Individual units are not eligible for FHA financing unless the entire association’s finances, reserves, insurance, budget and other items have been approved by the government.

The bill (H.R. 3700) aims at correcting a number of key problems by-

- Ordering the FHA to streamline the entire re-certification process for condo associations and make compliance “substantially less burdensome.” Condo experts predict this alone could convince significant numbers of associations to return to the FHA fold, thereby opening up sales and purchases to thousands more condo units.

- Reducing the minimum owner-occupancy ratio from the current 50 percent to 35 percent, unless FHA can provide justification for a higher percentage. Seth Task, a realty agent with Berkshire Hathaway HomeServices Professional Realty in Solon, Ohio, says the 35 percent ratio will allow “substantial” numbers of developments that can’t quite meet the 50 percent test to get back into the FHA program. In an interview, he cited the case of an elderly condo owner who listed her unit for sale with him recently, but the owner occupancy ratio in her development was 49 percent. Ineligible for buyers using low down payment FHA loans, she tried unsuccessfully to sell and ultimately had to accept an offer $10,000 below what she could have obtained if her building qualified for FHA financing.

- Allowing transfer fees. The legislation directs the FHA to stop rejecting condo communities because they collect small transfer fees when units are sold. The funds collected are used to support association activities – they benefit all residents. FHA will now have to follow the lead of Fannie Mae and Freddie Mac, both of whom consider community-benefit transfer fees acceptable.

- Providing more flexibility on the amount of commercial space permitted in condo developments. Some urban condos are designed for mixed-use – residential and commercial combined – because that’s what makes economic sense in their locations. Under current rules, some of these developments are ineligible because FHA considers their commercial component excessive. The legislation directs the agency to be more flexible and to take the local market context into account.

Will these changes be sufficient to revive FHA’s sagging condo program? “We are cautiously optimistic,” said Dawn Bauman, senior vice president at the Community Associations Institute, which represents nearly 34,000 condo communities and management organizations. Rita Tayenaka, past president of the Orange County (Calif.) Association of Realtors, told me the bill “is a good thing but will not be the end-all” in resolving FHA’s condo woes.

Most analysts agree that the actual effects will depend on two things- how quickly FHA puts its revised procedures into the field, and whether thousands of condo associations who’ve fled the program conclude, “OK they’ve cut the red tape, maybe it’s time to jump back in.”

It pays to check out your equity

By KENNETH R. HARNEY- July 22, 2016

WASHINGTON – Are millions of homeowners sitting on much bigger equity nest eggs than they think? Do you know how much equity you’ve got? If not, could you be missing opportunities to tap into it for worthwhile projects at close to all-time low interest rates?

Academic and financial industry research suggests that large numbers of Americans don’t keep track of their equity and don’t really know how they could use it. That’s curious because home equity has almost never been higher or easier to access.

The Federal Reserve estimates that, thanks to rising prices and principal paydowns, total home equity surpassed $13 trillion in the first quarter of this year, more than double what it was in 2011.

Black Knight Financial Services, a mortgage data and analytics company, estimated last week that $4.4 trillion of equity is immediately “tappable,” that is, owners can withdraw funds via equity credit lines, equity loans and cash-out refinancing, and still retain a healthy equity cushion in their homes.

Equity is the difference between the market value of your home and the total mortgage debt you’ve got against it. A $350,000 house with $175,000 in mortgage debt has equity of $175,000, a 50 percent equity position.

Thirty eight million owners nationwide have at least 20 percent equity, averaging $116,000 per owner, according to Black Knight. Many lenders will allow owners to tap into that equity to the extent that their total debt does not exceed 80 percent of the home’s appraised value.

So in the example of the $350,000 house with $175,000 in equity, you might be able to borrow another $100,000, bringing your total debt up to $275,000 or just under 80 percent of your property value.

If there’s no need to pull out that much – say you need some cash to renovate the kitchen and add a bathroom – you could borrow considerably less, say

$25,000 or $50,000.

But before any of that happens you need to know the basics about equity, starting with how much you’ve got.

Research by mortgage investor Fannie Mae and analytics firm CoreLogic has documented that owners frequently underestimate the home equity they’ve accumulated. Millions of owners saw their property values plummet during and after the financial crisis and recession. Following that nightmare many seem to have tuned out news of home value rebounds, which have been substantial in many metropolitan areas and spectacular in others.

If you don’t know your home’s approximate value, it’s tough to calculate your equity position, even if you know your unpaid mortgage balance to the penny. There are multiple resources online (Redfin.com and realtor.com are examples) to help you keep up with local sales trends and provide rough estimates of almost any property’s value. Just type in an address and see what pops up.

You can also talk with local realty agents and, if you’re willing to spend a few hundred dollars, hire an appraiser to get a professional opinion.

Then there’s the knowledge gap about equity-tapping tools and uses. New consumer survey research by Navy Federal, the world’s largest credit union, found that 55 percent of survey participants reported having “little or no knowledge of home equity loans or lines of credit.”

Eighty-eight percent were generally aware that home equity funds could be used for renovations to their homes, but between 32 percent and 48 percent didn’t know they could spend equity dollars on medical bills, weddings and “unexpected expenses.” In fact, lenders do not restrict your use of equity cash.

Equity credit lines, popularly known as HELOCs, for home equity line of credit, allow you to pull out funds whenever you need them, up to a set limit. Navy Federal’s HELOCs provide a 20-year period of withdrawals followed by 20 years to repay the balance. The current variable interest rate is 3.99 percent.

Equity loans are fully amortizing second mortgages; you pay interest plus principal for anywhere from five to 20 years.

Interest rates at major banks run from just above 4 percent and up, depending on your credit standing and equity cushion.

Still another way to access equity is to refinance your mortgage for a higher amount than your current balance – a cash-out refi. It’s like any other refi except that you walk away from the closing with money in your wallet and a larger loan balance, ideally at a lower interest rate than you had before.

Bottom line- Check out your equity. You may well have more of it at your disposal than you thought.