From the OC Register:
For 15 years, Judy Johnson planned to get a reverse mortgage when she retired, supplementing her Social Security with proceeds from her San Clemente condo.
But after she stopped seeing clients and shut down her public relations business last year, Johnson discovered the government had changed the rules on her.
Her three-bedroom condo in Talega Gallery no longer qualified for Federal Housing Administration-insured loans. As a result, she can’t get a reverse mortgage.
Even more aggravating is that Talega Gallery actually does not violate the FHA rules, which ban FHA financing for condos with private “transfer fees” paid to an activities fund when a home is sold. Neighboring associations in Talega pay those fees but Talega Gallery does not.
“I protested. I said this isn’t fair,” said Johnson, a former White House press aide who helped President Richard Nixon write his memoir. “They said, ‘We don’t care.’”
Now she’s living off savings and Social Security, with spending limited to the necessities. Fun and travel are outside her budget.
Another president may have come to this West Wing veteran’s rescue.
President Barack Obama signed a new bill into law July 29 that could ease FHA financing for thousands of home shoppers relying on the more affordable condo market.
Called H.R. 3700, the measure may expand the pool of affordable condos for first-time buyers and credit-challenged home shoppers, some say.
And because FHA-insured loans represent the lion’s share of reverse mortgages, it could provide relief to senior condo owners like Johnson, putting a comfortable retirement back in reach.
Off limits to condos
For a variety of reasons, condo owners and condo shoppers have been blocked from getting FHA loans, typically one of the easiest types of mortgages to qualify for.
Insured by the federal government, these loans have low down payments and borrowers can have less-than-perfect credit and still qualify.
Transfer fees – charged each time a home is sold – is just one issue.
In addition, the number of condo complexes certified for FHA financing plummeted in recent years after the government began requiring associations to reapply every two years.
As of last week, only 11 percent of Orange County’s estimated 3,800 condo associations were certified to get FHA financing, according to FHA Pros LLC, a Westlake Village firm that helps associations apply for such recognition.
Just 10 percent of all Southern California’s condominium projects and 6 percent of the nation’s 170,000 associations were certified, FHA Pros estimated.
That means the bulk of condos here and throughout the nation are off-limits for FHA mortgages, used mainly by home shoppers on tight budgets.
According to real estate data firm Black Knight, FHA and and Veterans Administration funding represented 19 percent of the 50.6 million loans outstanding in the U.S. as of June.
Until 2009, condo associations kept their FHA approval indefinitely, said Dawn Bauman, senior vice president of government affairs for Community Associations Institute, a homeowner association professional group. Also, FHA allowed spot loans for borrowers in unapproved associations.
After 2009, condo associations had to seek recertification every two years and spot loans were eliminated.
“When recertification came into play, the number of condo projects certified dropped off a cliff,” Bauman said.
Local Realtors also complained about another FHA requirement that half of a complex’s units had to be owner-occupied.
A ban on private transfer fees also impacted condo projects in large master-planned communities – among them Talega, Ladera Ranch, Los Angeles’ Playa Vista project and Riverside County’s The Preserve and Harveston projects – collecting a small assessment for activity funds upon the sale of a unit.
The new law seeks to make it easier for condo associations to get FHA certification.
For example, the minimum number of owner-occupied units drops to 35 percent, and the FHA must adopt more lenient transfer fee rules.
The U.S. Department of Housing and Urban Development, which oversees the FHA, also must ease the recertification process to make it less burdensome and consider making certification terms longer.
Many of the provisions are subject to final rules issued by HUD by the end of October.
Local agents and business leaders hailed the measure, saying it will increase the pool of affordable condos for sale.
The Orange County Association of Realtors formed a task force in recent years to encourage more associations to seek FHA and VA loan eligibility and to advocate for lowering the minimum number of owner residents.
“A lot of the condo associations out there got hit really hard during the recession and had a lot of investors come in, and the units have a lot of rentals,” said task force chair Lisa Dunn.
“First-time buyers can’t buy with an FHA loan in a community where the owner occupancy rate is under 50 percent,” Dunn said. H.R. 3700 is “really going to help more neighborhoods open up to first-time FHA buyers because that was holding them back.”
Too few to buy
Auto technician Mahyar Abab and his wife, teacher Ana Abab Marques, are in escrow to buy a condo in the Mission Courts condos in Rancho Santa Margarita.
But landing an Orange County home of their own for under $400,000 wasn’t exactly a picnic.
As first-time homebuyers using FHA financing, only about half of the condos on the market had the necessary certification that would allow them to buy, said their agent, Bob Wolff.
And without FHA, the Ababs would continue to be renters. With FHA, they only need to put about $13,000 down, or 31/2 percent of the purchase price.
“It’s hard to save for the down payment. It’s hard to save for the closing costs,” said Ana, 44. “Also the price is a little high at this time. And there’s a lot of competition. We made an offer on five places.”
The Ababs were competing with buyers paying 10 to 20 percent down, and in some cases, paying all cash. Some sellers also believe – erroneously, Wolff says – that the FHA process is more rigorous than conventional financing.
“The condos we were looking to buy sold for even more than the asking price,” added Mahyar, 49. “Five times, we got outbid.”
The Ababs – who have an 11-year-old son, Nickolas, and a pet fish named Simon – also avoided condos without certification, meaning that sellers are missing out on a significant number of buyers.
“If more associations and communities were FHA approved,” Wolff said, “ … their values would be enhanced by the greater demand.”
Community enhancement fees
Several large housing developments with “lifestyle” or “community enhancement” fees charged when a unit sells also lost FHA financing last year after HUD officials reinterpreted their guidelines, said Natalie Stewart, president of FHA Review, a Huntington Beach condo board advisory firm.
Ladera Ranch and Talega charge a quarter of 1 percent of a home’s sale price – or $1,250 on a $500,000 deal – to raise money for community parties, concerts, children’s activities and newsletters.
The FHA began turning down loan applications for those areas in the spring of 2015, Stewart said.
Although the restrictions also affected houses, as well other homeowner associations with transfer fees, impacts are minimal in higher-cost developments since FHA loans are limited to $625,500 in Orange and Los Angeles counties and to $356,500 in the Inland Empire.
Irvine lawyer F. Scott Jackson, who set up transfer fees for most of the homeowners associations around the state, said such fees enable HOAs to raise cash for community activities without increasing HOA fees. That increases the ability of homeowners to sell properties and get mortgage approvals, he said.
A HUD spokesman said that under H.R. 3700, Ladera’s and Talega’s transfer fees no longer will be an obstacle to getting FHA financing for condos.
But apart from increasing eligibility for homes in Ladera and Talega, some experts say H.R. 3700 will have little impact on the number of lower-cost condos that get FHA certification.
Many condo associations have other problems that prevented them from getting FHA certification, including inadequate reserves and restrictions on renting, said Stewart and FHA Pros LLC’s Chris Gardner
“In Orange County, I would be surprised if it had more than a 10 percent impact,” Stewart said.
Will she get her reverse mortgage?
Jackson said former Nixon aide Judy Johnson should expect a reversal on the decision blocking her reverse mortgage.
He called FHA’s original denial “baloney.”
Now that President Obama signed H.R. 3700, Jackson believes the new law will allow Ladera and Talega to become FHA eligible again. And therefore eligible for FHA-insured reverse mortgages.
But no one knows for sure until FHA’s final regulations, due in three months, come out.
Johnson bought her condo in a Talega Gallery triplex in 2001, planning to use the home as her nest egg.
The 55-plus community consists of about 40 condos and around 240 houses.
It’s the only HOA in the Talega master association that’s exempt from paying the “community enhancement fee” because it has its own clubhouse and collects its own activity fees through assessments, said Brian Taylor, manager of Talega’s master HOA.
Under a reverse mortgage, the loan is paid out monthly, so the borrower gets a monthly check rather than sending in a monthly payment to the bank.
Johnson verified before she bought her condo: Getting a reverse mortgage would not be a problem.
“I was 10 to 15 years from retirement, and I needed to figure how I would take care of myself when I got old and crotchety,” Johnson said. “I decided to plow all my money into my home.”
The practice changed last year. Local Realtors learned in early 2015 that FHA stopped backing loans in Ladera and Talega after 10 years of approving them. A HUD spokesman couldn’t explain why – apart from saying that the transfer fees violated long-standing FHA rules.
In January 2015, Johnson retired and began shopping for a reverse mortgage.
At first, brokers were excited to see her.
“I talked to tons of people, and every person said, ‘You are exactly the type of person reverse mortgages were meant to help,’” Johnson said. “However, when I said I could not get an FHA loan, it was a buzz kill on the conversation.”
She appealed FHA’s ruling to HUD. The lifestyle fee did not apply to her unit. HUD ruled that so long as it’s part of the Talega master association, her home would not qualify for an FHA mortgage.
She could tap the equity in her condo by other means. She could sell the home she loves and buy elsewhere. Or she could take out a conventional mortgage. All the other options come with steeper up-front costs.
With just her Social Security check as income, she lives very frugally, she said.
“I have the greatest house with a lot of equity in it. I mean, hundreds of thousands of dollars. And I live on Social Security,” Johnson said. “So I’m a poor church mouse.”
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