HR 3700 – what does it really mean? Not much. At least, not yet.
If you are a Common Interest Development (CID) expert or fan, you may have heard of HR 3700 (Housing Opportunity Through Modernization Act). There is a lot of buzz surrounding it in the community association industry. The bill, signed into law on July 29th this year, includes changes intended to relax the tough criteria in the Federal Housing Administration (FHA) Condominium Certification Process. While it does include language that might make some positive changes, it may not have the big impact people are hoping.
FHA Certification/Approval is necessary to get an FHA loan to purchase or refinance in a condominium association (this includes Reverse Mortgages). In response to the surge in FHA loans after the 2008 housing crisis, the Department of Housing and Urban Development (HUD) revamped their FHA Certification program and changed the criteria for approval. One of the major changes was the removal of the Spot Approval program. The loss of this program and the other changes they made at that time have left many associations unable to achieve or maintain FHA certification. Many owners are struggling to refinance or sell their units because of it.
HR 3700 includes the following with regard to FHA Condo Certification–
(keep in mind, NONE of these changes are immediate. The bill requires HUD to consider each one and address it within 90 days. (10/29/2016))
Owner-occupancy ratios: The current owner occupancy criteria states 50% of units must be owner-occupied, the bill proposes lowering the percentage to 35%. This would be a welcome change for communities that have owner-occupancy issues; however, the actual language in the bill doesn’t automatically reduce the percentage. HUD has 90 days to respond to this request, and if the 35% rule does become the new standard, the FHA will retain the option to increase the percentage on a case-by-case basis.
Recertification Requirements: HR 3700 obliges the FHA to modify the requirements for recertification (which is required every 2 years) to make it “substantially less burdensome than original certifications.” It is our prediction that HUD will not make any additional changes to the current requirements. The language in HR 3700 was written prior to Mortgagee Letter 2015-27, which was released in November of 2015.
HR 3700 also asks the FHA to consider lengthening the time between certifications, and recommends “updating” the community association information already on file. Again, the changes made in November of 2015 have already satisfied this requirement by reducing the necessary documentation for recertification. Even with the streamlined process in place, the financial documents and insurance are heavily scrutinized. HUD has not given any indication they will lengthen the time between certifications beyond 2 years.
Transfer Fees: Currently the FHA will not accept a condominium project that has deed based transfer fees. The proposed changes suggest that the FHA should follow the Federal Housing Finance Agency’s (FHFA) standards. This would help in several communities (most notably Ladera Ranch, and the Coachella Valley) where these fees are common and virtually impossible to remove from the governing documents. The FHFA standard does not allow fees paid to a developer or other third-party, however they do allow fees that benefit the community.
Commercial Space: The bill proposes that lenders have increased flexibility when dealing with loans on projects that include commercial space. Currently special exceptions must be escalated past the local FHA Homeownership Center (HOC), and Direct Endorsement Lender Review and Approval Process (DELRAP) lenders have no flexibility right now. These changes would only potentially affect communities with Commercial Percentages over 50%.
In summary, HR 3700 is a step in the right direction; however, it is yet to be seen if any major changes will be made as a result of it’s enactment.
Natalie Stewart is President of FHA Review. Ms. Stewart also posted in the CLAC blog on a similar topic last year, “Tips for Getting Your Community FHA Approved”. You can reach Ms. Stewart directly by emailing her at Natalie@fhareview.com.
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