Getting FHA Back in the Condo Market

For several years I've been involved in a push to get the Federal Housing Administration (FHA) to update the Agency's condominium rules. This has been a long-term effort fraught with fits and starts, built on a foundation of bureaucratic inertia.

This has always been an access to credit issue for me. Unless a condo building is approved by FHA, no one in the building can be approved for an FHA-insured mortgage.  For many, an FHA-insured mortgage is quite literally the key to household formation and wealth-creation.

This is particularly the case for first-time buyers and minority borrowers. No FHA condo approval makes the path to homeownership more narrow and difficult than it already is for these who want to purchase a home in a condominium.

I want to share two charts that I believe make a clear case why reforming the FHA condominium approval process is important for condominium homeowners and homebuyers across the country.

The first chart (a map, actually) shows the approximate location of each FHA-approved condominium in the lower 48 states as of March 2018. More than 50 percent of FHA-approved condominiums are concentrated in a handful of states.

Source FHA

If you live in two housing markets in California, along the North East's Acela Corridor, or a few hot spots in between, you may can find a condo that is FHA-approved. Live anywhere else and you're out of luck.

Consider West Virginia. As of June 5, 2018, only two condominiums in the state are FHA-approved, with just 36 condominium units eligible for FHA-insured mortgages. 

There are 132 FHA-approved condominiums in the state of Texas, which is almost equal to the number of FHA-approved condominiums in Washington, D.C.! Florida, the king of condos, has only 124 with an FHA approval. My home state of Louisiana has a grand total of 13 FHA-approved condos.

In 2017, 50 percent of FHA-approved condos were in just 5 states, with 20 percent in California alone. This doesn't look like a program meeting a duty to serve national credit markets.

Go further down the rabbit hole and it only gets worse.

In May 2017, 10,009 condos were FHA-approved. As of June 2018, that number stands at 9,820. FHA's stop-gap condo policies put in place during the Great Recession (which remain largely in place despite congressional instructions to the contrary) precipitated the run-off in FHA-approved condos.

Over the past 2 years more than 3,500 condominiums have opted against renewing FHA-approval. This awful retention rate should tell policymakers something is horribly wrong.

The second chart illustrates the harsh impact these policies continue to have on consumers seeking an FHA-insured mortgage to buy a condo unit. The data show FHA essentially vanished from the condominium market beginning in 2011. 

Source: FHA Outlook Reports, 2001-2012; FHA Production Reports, 2013-2017

When condo homeowners and homebuyers needed FHA to be a counter-cyclical force during the housing crisis, FHA walked away from the market. This is still the case today.

Note the sharp and sustained reduction in the number of condominium unit mortgages insured by FHA in the years following 2010. In 2017, condominium unit mortgages accounted for only 2.5 percent of all mortgages insured by FHA. These data tell me that FHA’s condominium approval rules are having a profoundly negative impact on the Agency’s ability to serve first-time homebuyers and minority borrowers in the condominium housing market.

We are well into the 7^th year of FHA’s pullback from insuring condominium unit mortgages. What can be done?

In 2016 the Obama Administration proposed a new FHA condominium rule. On balance, the proposed rule is an attempt to make FHA a more reliable partner for condominium associations during and after the approval process. The Obama Administration didn't get this rule over the finish line and it was caught up in the transition and the Trump Administration's regulatory review.

HUD officials continue to vow condos are among the highest of Secretary Carson's priorities. A senior FHA official recently testified at a House Appropriations Subcommittee hearing that the Agency is hard at work and hopes to get a condo rule finalized by year's end, at the latest.

But mostly, I've been told nothing substantive would happen on condos until FHA had a Senate-confirmed Commissioner. We checked that box last month and this week Brian Montgomery is back at work in his old office on HUD's 9th Floor. 

I'm choosing to believe the condo rule is at the top of his to-do list.