# Project Approval for Single-Family Condominiums > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-17213 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 15, 2019 - **Citation:** 84 FR 41846 ## Text DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 203, 206, and 234 [Docket No. FR-5715-F-02] RIN 2502-AJ30 Project Approval for Single-Family Condominiums AGENCY: Office of the Assistant Secretary for Housing-Federal Housing Commissioner, HUD. ACTION: Final rule. SUMMARY: This final rule implements HUD's authority under the single-family mortgage insurance provisions of the National Housing Act to insure one-family units in a multifamily project, including a project in which the dwelling units are attached, or are manufactured housing units, semi-detached, or detached, and an undivided interest in the common areas and facilities which serve the project. The rule provides for requirements for lenders to obtain approval under the Direct Endorsement Lender Review and Approval Process (DELRAP) authority for condominiums, and for standards that projects must meet to be approved for mortgage insurance on individual units. The rule provides for flexibility with respect to the concentration of Federal Housing Administration (FHA)-insured units, owner-occupied units, and the amount that can be set aside for commercial and non-residential space. This will enable HUD to vary these standards, within parameters, to meet market needs. This final rule follows a proposed rule published in the Federal Register on September 28, 2016. DATES: The effective date of this rule and the related handbook is October 15, 2019. FOR FURTHER INFORMATION CONTACT: Elissa Saunders, Director, Office of Single Family Program Development, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW, Washington, DC 20410-8000; telephone number 202-708-2121 (this is not a toll-free number). Hearing- and speech-impaired persons may access this number through TTY by calling the Federal Relay Service at 800-877-8339 (this is a toll-free number). SUPPLEMENTARY INFORMATION: I. Background Section 2117 of the Housing and Economic Recovery Act of 2008 (Pub. L. 110-289) (HERA) amended the definition of “mortgage” in section 201(a) of the National Housing Act (12 U.S.C. 1707(a)) to provide authority for HUD to insure individual condominium units under the single-family program under section 203 of the National Housing Act (12 U.S.C. 1709). At the same time, HERA amended HUD's prior authority for condominium units, section 234 of the National Housing Act (12 U.S.C. 1715y), to require a blanket mortgage for the project. Due to this change and other restrictive requirements under section 234, the single-family mortgage insurance program under section 203 became the primary vehicle for FHA mortgage insurance for units in condominium projects. Section 2132 of HERA also provided for implementation of section 2117 by notice. Accordingly, HUD issued mortgagee letters implementing the program (2009-46a, 2009-46b, and 2011-03). These were then consolidated into the Condominium Project Approval and Processing Guide (the Guide), the current operational guideline for the program. The Housing Opportunities Through Modernization Act of 2016 (Pub. L. 114-201) (HOTMA) became law on July 29, 2016. Title III of HOTMA established by statute certain requirements. Among these was a requirement that HUD issue a regulation within 90 days from enactment ( i.e., by October 27, 2016), requiring that any requests for exceptions to the limitation on commercial space be processed under either the DELRAP or HUD review and approval process (HRAP), and that in determining whether to grant the exception, factors related to the economy of the local area of the project, or to the project itself, be considered. The statute also required HUD, by regulation or less formal means, including a mortgagee letter, to establish an owner-occupancy requirement, also in the same time frame. If HUD failed to do so, the statute provided that the minimum owner-occupancy percentage for a project would be 35 percent of all family units, including those not covered by an FHA-insured mortgage. On October 26, 2016, HUD issued the required mortgagee letter, establishing the general owner-occupancy percentage for an existing project at 50 percent, unless certain specific indicators were met indicating lower risk, and allowing for review by HUD under HRAP, in which case the requirement could be as low as 35 percent. Title III of HOTMA also provided for changes to HUD's treatment of private transfer fees (these are in effect based on statutory authority and are not part of this rulemaking). II. The Proposed Rule HUD issued the proposed rule on September 28, 2016 (81 FR 66565), both to codify the program, and, based on experience, to offer greater flexibilities and efficiencies that would increase participation in the program and make it more responsive to changes in the marketplace. A. DELRAP The rule proposed that participants in DELRAP must: Be a Direct Endorsement (DE) lender under 24 CFR 203.3: Have a one-year experience requirement for all staff participating in DELRAP approvals; have originated no fewer than 10 FHA condominium loans; and have an acceptable quality control plan. There is also a process for first obtaining conditional DELRAP authority before obtaining unconditional authority based on performance, and periodic performance monitoring. As proposed, HUD can take action based on non-performance, legal or rules violations, including any action listed in § 203.3(d), or termination of DELRAP authority. The proposed rule also established a process for reinstatement. B. Definitions The rule proposed new definitions for a number of terms, including Condominium Association (or Association), Condominium Project, Condominium Unit, Infrastructure, Single-Unit Approval (SUA), and Site Condominium. The definition of Condominium Association makes clear that the homeowners who manage the financial and common areas of the condominium project are the Condominium Association as meant by this rule, regardless of the name used. The proposed definition of Condominium Project and Condominium Unit are based on 12 U.S.C. 1707(a), which is also the usual usage of that term in the industry. The proposed definition of Infrastructure, which is related to the requirement in § 203.43b(d)(4) of this rule, that the project or legal phase be complete and ready for occupancy, includes utilities, common elements, and amenities, such as parking lots, swimming pools, golf courses, playgrounds and similar items called for in the project or legal phase. The proposed definition of Single-Unit Approval is approval of one unit, in accordance with § 203.43b(i) of this rule, in an unapproved project. The proposed definition of Site Condominium is a single-family detached dwelling (without any shared garages or attached buildings), including the site and air space, which is encumbered by a declaration of condominium covenants or condominium form of ownership. Finally, this rule adopts the definition of Rental for Transient or Hotel Purposes in section 513(e) of the National Housing Act (12 U.S.C. 1731b(e)). C. Eligibility for Approval Section 203.43b(c), as proposed, would require approval by HUD (HRAP) or by a mortgagee (DELRAP). Otherwise, the project would have to meet the additional requirements for a Site Condominium or for Single-Unit Approval. To be approvable, the project would have to meet the eligibility requirements of § 203.43b(d) of this rule. These include: Being primarily residential in nature; consisting entirely of dwelling units that are one-family units; being in full compliance with applicable laws and local approval requirements with respect to the condominium plat and development plans; and being complete and ready for occupancy, and not subject to further rehabilitation, construction, phasing, or annexation (if the construction consists of legal phases, this requirement and the requirements of § 203.43b(e) of this rule applies to each phase). In addition, the rule proposed that HUD may establish further requirements for eligibility through notices under § 203.43b(d)(6), such as insurance requirements, financial condition, nature of title, the existence of any pending legal action or physical property condition (§ 203.43b(d)(6)(i) through (vi)), and such other matters as may affect the viability or marketability of the project or its units (proposed § 203.43b(d)(6)(xi)). D. Flexibility The rule proposed to grant flexibility in three key areas, to allow HUD to respond quickly to changes in market conditions. The three areas are the amount of commercial/non-residential space; the maximum percentage of FHA-insured units; and the minimum percentage of owner-occupied units (§ 203.43b(d)(6)(vii), (viii), and (ix)). Within each range, HUD may from time to time issue a notice establishing a particular percentage or percentages. As proposed, the ranges are: For commercial space, between 25 and 60 percent of the total floor area; for units with FHA-insured mortgages, between 25 and 75 percent of the total number of units in the project; and for owner-occupied units, likewise between 25 and 75 percent of the total units. Changes in the upper and lower limits of the ranges would be published for 30 days of public comment (§ 203.43b(f)). E. Legal Phasing As proposed, legal phasing only would be permitted as long as the phase is fully built out and the dwelling units have a certificate of occupancy (CO). Both vertical buildings and detached or semi-detached developments would be required to be contiguous (§ 203.43b(e)). F. Reserve Requirements Generally, the proposed reserve requirement would be at least 10 percent of the monthly unit assessments. A lower amount could be deemed acceptable by HUD based on a reserve study completed not more than 24 months before a request for a lower reserve amount is received (§ 203.43b(d)(6)(x)). G. Exceptions The rule provided in proposed § 203.43b(f) (§ 203.43b(g) of this final rule) that the Secretary may discretionarily grant an exception to the requirements found in § 203.43b(d)(6), provided that the statutory conditions for exceptions to the commercial space requirements enacted under HOTMA and codified under 12 U.S.C. 1709(y)(2) are met. These are that the request and disposition of the request for the exception may be made at the option of the requester under the DELRAP or HRAP process; and that in determining whether to allow the exception, factors relating to the economy for the locality in which the project is located or specific to the project, including the total number of family units in the project, shall be considered. H. Recertification The rule proposed to extend the recertification period for an approved project from 2 to 3 years, and allow recertification by updating previously submitted information, rather than resubmission of all information. There would be a window of 6 months before to 6 months after the expiration of approval to submit a request for recertification. I. Single-Unit Approval The rule proposed in § 203.43b(h) (§ 203.43b(i) of this final rule) to allow approvals on individual units that are not in approved projects and not in projects that have been subject to adverse determination for significant issues that affect the viability of the project. The project must be complete and ready for occupancy under § 203.43b(d)(4), must not be a manufactured home, and must have at least five dwelling units. The upper limit on single-unit approvals as proposed would be in a range from 0 to 20 percent of the total number of units in the project, the exact percentage to be established by HUD through notice. J. Site Condominium The rule proposed at § 203.43b(i) (§ 203.43(j) of this final rule) that for Site Condominiums, insurance and maintenance costs must be the responsibility of the unit owner, and that any common assessment collected must be restricted for use solely for amenities outside the footprint of the individual site. K. Rehabilitation Loans The rule proposed to revise 24 CFR 203.50 to permit FHA insurance under the 203(k) program for loans to rehabilitate the interior space or install firewalls in the attic of a condominium unit. Such FHA mortgage insurance would not cover any exteriors or areas that are the responsibility of the Association. The loan limits would be those stated in § 203.50(f), and for condominiums that are not manufactured homes, townhouses, or Site Condominiums, 100 percent of the after-improvement value of the condominium unit. L. Part 234 As provided in the proposed rule, part 234 now will apply in cases where the project has a blanket mortgage insured by HUD. This part 203 applies to the more usual condominium configuration, that is, a one family unit and undivided interest in the common areas and facilities. III. This Final Rule After further consideration, including careful consideration of public comments, HUD has made some changes in this final rule. A. DELRAP Qualifications HUD received multiple comments concerning the proposal to only allow staff meeting the experience requirement to use DELRAP authority to approve Condominium Projects. Commenters indicated that the proposed credential requirements impose a barrier for smaller lenders to fully participate in the DELRAP program. Given the comments received, where HUD had proposed that all staff involved in DELRAP activities had to meet the experience requirements, the final rule revises proposed § 203.8(b)(1)(iv) to allow participation by staff supervised by personnel that meet the experience requirements in response to public comments. Also, the proposed rule provided that, to be granted unconditional DELRAP authority, a lender would have to complete at least five DELRAP reviews. HUD recognized that such a requirement may not always be necessary; therefore, this final rule, in § 203.8(b)(3), gives HUD the flexibility to reduce this number where appropriate, for example, in the case of a DELRAP lender with significant experience under the current program. This will ease potential burdens on lenders who wish to participate and who have qualified supervisor personnel. B. Definitions The definitions in § 203.43b(a) of “Condominium Project” and “Condominium Unit” have been reworded and reorganized. Substantively, the definition of “Infrastructure” is removed and a definition of “Common Elements” is added. In addition to typical items, the definition includes a catch-all, “other areas described in the condominium declaration.” The definition of “Site Condominium” is revised to address the problems with air space that the public comments identified, and to allow for different Site Condominium arrangements existing in the marketplace that can potentially be approved. The inclusion of air space in the proposed rule was identified in public comments to potentially create conflicts with laws of certain states. C. Suspension of FHA Case Numbers HUD currently monitors FHA insurance concentration for projects that are, or have been, FHA approved. With the introduction of the Single-Unit Approval process, HUD recognizes the need to enhance the insurance concentration tracking mechanism to determine compliance with the concertation ranges allowed. A commenter also noted the importance of having a reliable tracking system in place and available to the public to track percentages of single-unit approvals. In the context of the maximum percentage of units with FHA-insured mortgages under § 203.43b(d)(6)(viii), and in the context of single-unit approvals under § 203.43b(i)(2), this final rule adds a statement that “HUD may suspend the issuance of new FHA case numbers for a mortgage on a property located in any project where the number of FHA-insured mortgages exceeds the maximum.” The maximum percentages that apply will be established by notice. This additional provision to the final rule will allow FHA to build a robust process to proactively manage FHA insurance concentration while recognizing the need for lenders to operationalize the impact of such a requirement early in the loan lifecycle so as not to affect the origination process. D. Secondary Residences The proposed rule provided that units occupied as a principal or secondary residence as defined under § 203.18(f)(2) would count towards the required minimum percentage of owner-occupied units. As commenters indicated, the definition established under § 203.18(f)(2), which establishes the definition for the purpose of permitting FHA financing on a secondary residence which requires analysis of the lack of affordable rental housing is too restrictive and out of scope in the context in which HUD or the DELRAP lender is looking at the owner-occupancy level of the project to determine whether the project is approved. Thus, solely to calculate owner-occupancy percentage, this final rule provides that any unit that is occupied by the owner as his or her place of abode for any portion of the calendar year other than as a principal residence and that is not rented for a majority of the calendar year shall count towards the total number of owner-occupied units. While such a definition for the purpose of calculating owner occupancy for condominium project approval is more expansive, the definition in § 203.18(f)(2) will continue to be used when determining eligibility of mortgage secured by a borrower's secondary residence. E. Reserve Study The proposed rule in § 203.43b(d)(6)(xi) stated that for an approvable project to have less than 10 percent of the monthly unit assessments in a reserve account, the lesser amount would have to be based on a reserve study completed within 24 months of the request for the lower amount. The final rule, in § 203.43b(d)(6)(x), enlarges this time to 36 months, or, in the case of HRAP, such greater amount of time as the Secretary determines. This change conforms with HOTMA's requirement that HUD streamlines the recertification process for approved properties by considering lengthening the time between certifications, see 12 U.S.C. 1709(y)(1). F. Eligibility for Approval: Financial Condition The final rule states that the financial condition component of the further approval requirements in § 203.43b(d)(6)(v) includes the allowable percentage of units in a project owned by a single owner. This comports with current practice in the marketplace and was recognized as a key policy consideration to prevent a financial shock that may occur in the event of an economic failure by a single owner with a large share of units in a complex. G. Percentage Ranges This final rule, following the proposed rule, sets a range within which HUD may make specific determinations on minimum owner-occupancy percentage, maximum FHA-insured mortgage percentage for project approval, maximum FHA-insured mortgage percentage for Single-Unit Approval, and maximum percentage of floor area taken by commercial or nonresidential space. There is an ability to grant case-by case exceptions to any of these ranges under § 203.43b(g). Additionally, if HUD determines to adjust the upper or lower limits of these ranges, the rule provides for a public comment process under § 203.43b(f). HUD may establish multiple limits within a range for owner-occupancy and commercial space for differently situated projects. For example, the owner occupancy limit may be established differently for newly constructed projects, in which a number of units likely would not yet have transferred to first owners, and for existing projects, which are more likely fully sold. This final rule makes some minor changes to the proposed rule regarding the percentage ranges of owner-occupants and commercial/nonresidential space. In the case of the maximum allowed percentage of units with FHA-insured mortgages for project approval, this final rule makes no change. 1. Owner Occupancy The possible range for the minimum level of required owner-occupancy for project approval is narrowed slightly; the floor is set at 30 percent in this final rule. This is in part because under current HUD practice, the minimum owner occupancy percentage for new construction is 30 percent of the total units, and the lower end of the range must be set to accommodate newly constructed projects. In part, it provides FHA with additional room to calibrate this requirement to a level below that identified in HOTMA (35 percent) as the default, if necessary, in response to housing market changes. A 30 percent owner occupancy percentage is the lowest limit compatible with risk to the Mutual Mortgage Insurance Fund (MMIF). The upper limit of 75 percent remains unchanged from the proposed rule. This upper limit flexibility is necessary to manage risk. Unlike Fannie Mae and Freddie Mac (which require 50 percent owner occupancy for certain types of projects 1 ), HUD cannot require larger down payments or higher credit scores, but must manage risk to the MMIF in other ways. Depending on future market conditions, flexibility to require 75 percent owner occupancy is needed if it is determined that a lower owner-occupancy rate is contributing to loan delinquency. 1 See Fannie Mae Selling Guide, B4-2.2-02: Full Review Process (6/5/2018) on investment properties' 50 percent requirement. This is available at https://www.fanniemae.com/content/guide/selling/b4/2.2/02.html. A similar requirement for investment property—that at least 50 percent of the total number of units in the condominium project must have been conveyed to purchasers who occupy their units as a primary residence or second home—is at chapter 5701.5(c)(2) in the Freddie Mac Single-Family Seller/Servicer guide. This is available at http://www.freddiemac.com/singlefamily/pdf/guide.pdf (visited 3/18/2019). If HUD determines to change the owner-occupancy threshold within these limits, it will examine a variety of market factors. These will generally include: • FHA portfolio analysis of default and claim rates of loans with similar attributes across different bands of owner occupancy percentages. The bands would be, for example, 10 percent bands of owner occupancy percentages. • Analysis of FHA condominium loans across geographical areas segmented by average owner occupancy ratios ( e.g., average owner occupancy ratios in metropolitan areas versus rural areas). • Analysis of trends of financial stability of condo projects in relation to owner occupancy ( e.g., relationship of default and claim rates when compared with factors that determine financial stability and owner occupancy percentages). HUD may consider other relevant factors as well. 2. Maximum Commercial/Nonresidential Space This final rule reduces the maximum commercial space percentage upper limit to 55 percent of the total floor area. While there was substantial support for a 50 percent limit on nonresidential commercial space, a number of public comments supported a maximum limit for commercial space above 50 percent. There are many potential benefits of mixed-use development, and recent real estate trends studies support continued demand for these types of projects. 2 The 55 percent ceiling would give HUD future room to grant an exception under HRAP where HUD's review shows that a specific case warrants it (or, under DELRAP review in the case where the exception is at the request of an eligible party and the requester asks for DELRAP review under 12 U.S.C. 1709(y)(2)(A)), while still maintaining the overall residential character of the project. 2 Real Trends: The Future of Real Estate in the United States by Urban Economics Lab and MIT's Center for Real Estate (October 2017). The study is available at https://mitcre.mit.edu/wp-content/uploads/2017/10/REAL-TRENDS-MIT.pdf (visited 3/18/20190). The lower limit of the range for the maximum allowable commercial space remains at the proposed 25 percent. This percentage aligns with the historical maximum commercial space allowed in a condominium project across the industry. However, mixed-use development is an upward trend in the marketplace. 3 Fannie Mae recently increased the maximum percentage of commercial space in a condominium to 35 percent from 25 percent, 4 consistent with this upward trend. This is also consistent with the Emerging Trends in Real Estate ® report, which states that there is a trend toward mixed-use development with a mixture of residential, with retail and other commercial uses. 5 HUD believes that 25 percent of commercial/nonresidential space of the projects total floor area sets the historical lowest maximum for a mixed-use project that has been used for the program to be successful. The maximum percent of commercial/non-residential space will be established within this range considering current and projected real estate market trends. 3 Id. at 19 (“Around the globe, `live, work, play' has become a fashionable mantra for urbanism and real estate development. This trend has spurred the rescue and redevelopment of historical neighborhoods. It also has yielded new and denser mixed-use developments . . . . The resurgent prominence of quality urbanism in the United States is here to stay and will keep on energizing a segment of the industry.”). 4 Fannie Mae Selling Guide B4-2.1-03: Ineligible Projects (6/5/2018). This is available at https://www.fanniemae.com/content/guide/selling/b4/2.1/03.html. 5 PWC and Urban Land Institute, Emerging Trends in Real Estate®: United States and Canada 2019 at 83 (“There also is a trend toward redeveloping urban malls by intensifying sites with mixed-use properties that combine retail with high-density residential, restaurants, community services, green space, and experiential attractions. . . .”), available at https://www.pwc.com/us/en/industries/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html (visited 3/18/2019). The data which HUD will consider when changing the specific percentage of commercial space allowed for project approval, within the permitted range, will generally include: • FHA portfolio analysis of default and claim rates of loans with similar attributes across different bands of commercial/nonresidential space percentages ( e.g., default and claim rates for purchase transactions at commercial/nonresidential percentages in appropriate percentage bands that HUD will select. • Analysis of FHA condominium loans across geographical areas segmented by average commercial/nonresidential space percentages ( e.g., average commercial/nonresidential space percentages in metropolitan areas versus rural areas). • Analysis of trends of financial stability of condo projects in relation to commercial/nonresidential space percentages ( e.g., relationship of default and claim rates when compared with the percentage of the residential portion of the project financial stability and the commercial/nonresidential space percentage). HUD may consider other relevant factors as well. 3. Maximum FHA-Insured Concentration for Project Approval The final rule makes no change to the 25-to-75 percent range proposed for the maximum FHA insurance concentration requirement. The upper limit of 75 percent is the maximum risk exposure to the MMIF that HUD is willing to accept. At the same time, the range must be wide enough to accommodate qualified borrowers in multiple markets where access to affordable housing and financing may be difficult. In changing the maximum amount of units with FHA mortgage insurance for project approval within the allowable range, data points will generally include: • Analysis of FHA market share of condominium loans versus market share of non-condo loans. • Analysis of FHA market share of condominium loans versus market share of non-FHA condo loans. • Analysis of default and claim rates of loans with similar attributes across different bands of FHA concentration percentages. • Analysis of FHA concentration percentages segmented by geographical areas. • Analysis of performance of FHA condo to non-FHA condo loans. HUD may consider other relevant factors as well. 4. Maximum FHA-Insured Concentration for Single-Unit Approval This final rule implements the proposed rule's 0-to-20 percent range with the addition of an allowance for a de minimis number of units in projects with less than 10 units. Section 203.43b(h) has been reorganized in this final rule and redesignated as § 203.43b(i). The lower limit of 0 percent is set as a risk control measure if, for example, evidence shows that SUA loans show a significantly worse performance when compared to similar loans in approved projects. Most projects do not have a significant proportion of FHA-insured units. Under a 20 percent cap, 90 percent of current approved projects could have employed a single-unit loan approval. Under a much more restrictive 10 percent ceiling, 73 percent of current projects could have avoided the project-approval process through single-unit loans. Thus, the 20 percent limit would allow HUD great flexibility to allow single-unit loans in unapproved projects. This would enable smaller condominium projects, for whom applying for project approval might be too costly, to have similar access to FHA mortgage insurance as currently approved projects. In setting or changing the maximum FHA concentration for single-unit approval, data points that HUD will consider will generally include: • Analysis of SUA loan performance compared to the performance of loans made in approved condo projects. • Analysis of SUA loans across geographical areas and further segmentation by average owner occupancy ratios and financial stability. HUD may consider other factors as well. H. Phasing, Contiguous/Adjoining Requirement Proposed in § 203.43b(d)(6)(x)(B) was a requirement that in a detached or semi-detached development, all homes in a phase must be adjoining or contiguous. A number of public comments pointed out problems with this requirement, and this requirement is removed in this final rule. The requirements that all homes in a phase be separately sustainable, built out, and ready for occupancy remain. This material has been reorganized and is in § 203.43b(e) of this final rule. I. Site Condominiums This final rule revises the definition of Site Condominium in § 203.43b(a) to include projects consisting of single family detached dwellings that do not have shared garages or any other attached buildings, as well as single family detached or townhouse-style horizontally attached dwellings where the unit consist of both dwelling and land. The rule also removes the requirement in proposed § 203.43b(i) that all common assessments collected would have to be used solely for amenities outside the footprint of the individual site; however, the requirement that insurance and maintenance costs of the individual units must be the sole responsibility of the unit owner remains (see § 203.43b(j) of this final rule). When combined with the revised definition of Site Condominium, the requirements under this rule better accommodates the Site Condominium arrangements that exist in the market. Because manufactured home condominiums are processed under the HUD review and approval process, the final rule definition clarifies that Site Condominiums do not include manufactured homes. J. Rehabilitation Loans This final rule removes the exclusion of condominiums, other than Site Condominiums, from the 100 percent of the after-improvement value of the unit loan amount restriction (24 CFR 203.50(f)(3)). K. Home Equity Conversion Mortgages (HECMs) This final rule makes technical and clarifying changes to part 206 to avoid potential confusion as to the insurability of HECM condominium loans. IV. Public Comments and Responses This proposed rule was published in the Federal Register on September 28, 2016 (81 FR 66565), and the public comment period closed on November 28, 2016. HUD received 91 comments by the close of the public comment period. Commenters included individuals, mortgage companies, banks, trade associations, realtors, and mortgage brokers. The following is a summary of the significant issues raised in the public comments. In addition to the specific issues noted, some commenters expressed general support for the rule, citing the increased flexibility and opportunities for homeownership. General Comment: HUD's rules are too restrictive and should be loosened to allow projects to participate and buyers to have more access to affordable housing. Condominiums are currently the strongest and least risky part of FHA's portfolio, yet FHA has significantly reduced condo approvals since 2009, and provisions in this rule will further decrease the FHA's share of the market. Making FHA insurance for condominium mortgages more widely available will help first-time homebuyers, including millennials, as well as seniors and low-to-moderate income buyers. Condominium mortgages perform better than other single-family mortgages, so increasing their availability will benefit the housing market and the FHA insurance fund. HUD Response: HUD recognizes that mortgages secured by condominiums currently perform better than non-condominium secured mortgages, while noting that prior to FHA's approval process in 2009, the opposite was true. In order to achieve the appropriate balance between meeting the housing needs of the borrowers FHA's mortgage insurance programs were created to serve and to minimize the level of risk undertaken relative to the insurance, this rule provides additional flexibility and a basic framework for condominium project approval. HUD plans to issue additional guidance, with elements that can be changed as the market changes. HUD believes this approach will alleviate this concern and allow HUD to achieve the right balance as market conditions may change. Comment: Many economic analyses are showing a shortage of multifamily housing in location-efficient areas and an oversupply of detached single-family houses. The closer we get to single-family and multifamily projects having the same approval requirements, the more efficient our housing market will be, the more we will get out of our developed land, the more we will conserve our pristine land, the more choices we can provide for people who may not necessarily want to use a car for every errand, and the more energy-efficient our cities will be. This proposed rule is a good first step, and it should be revised to go even further towards normalizing the lending rules. HUD Response: HUD believes this rule strikes the correct balance between providing flexibility while protecting the Mutual Mortgage Insurance Fund and recognizing the difference in ownership of single-family dwellings that are maintained solely by the owners versus condominium ownership that includes maintenance by owners and associations. Comment: Due to the significance of the changes, there should be a 12-month implementation period. HUD Response: This final rule provides for a 60-day implementation timeframe that allows stakeholders to view additional guidance provided in HUD handbooks prior to implementation. Comment: Commenter states that condominiums are currently the strongest and least risky part of FHA's portfolio, yet FHA has significantly reduced condo approvals since 2009. This commenter urges FHA to ease restrictions on condominiums in many areas. Comment: Many families want to purchase their own home and want to purchase condos; however, many lenders are not able to support the purchase because the condo project is not FHA approved. It would be nice to see if FHA could allow more condo projects to be allowed to participate in the FHA Home Loan program. It would open doors to those that are not able to qualify under conventional home loan terms. HUD Response: This final rule provides the framework to establish flexibility, with increases and decreases, in applying the rule's standards through policy. It also includes the ability to obtain Single-Unit approval as an opportunity to provide access to FHA's programs in unapproved condominium projects. The Proposed Flexible Percentage Ranges for Owner Occupancy, Commercial/Nonresidential Space, and FHA Concentration Comment: HUD states that setting a range would allow FHA to vary the specific percentage, at will, that it believes to be responsive to market changes. The commenter does not understand the purpose of the ranges as it is the specific percentage that will have a more direct impact on condominium project eligibility for FHA insurance. While HUD proposes to offer the public the opportunity to comment if it considers changes to the upper and lower limits of the range, it would not offer the same opportunity when resetting the specific percentage within the range. The public should also receive notice and an opportunity to comment if HUD is considering a change in the specific percentage within the range as the specific percentage will have a greater impact on buyers and sellers than a change in the range. Further, the commenter requests confirmation that the case-by-case exceptions to specific limits allowed under the Guide and subsequent Mortgagee Letters will remain in effect under the new regulations. HUD Response: The purpose of the proposed rule was in part to give the public the opportunity to comment on the potential upper and lower limits of the ranges for owner occupancy, FHA concentration, and nonresidential/commercial space. Thus, the public has had a chance to comment on the range of possible choices. In order to correctly allocate risk, HUD may potentially have to implement choices within these ranges quickly. HUD believes that the comment process adopted in the proposed rule balances the need for public involvement in the rulemaking with the need for market flexibility. As to any future change HUD might make to percentages within the ranges, this preamble identifies the factors that HUD will consider at section III.G of this preamble. As to the availability of case-by-case exceptions, such exceptions are permitted under § 203.43b(g) of this final rule (unchanged from § 203.43b(f) of the proposed rule). In the case of exceptions to the commercial/nonresidential space percentage, as required by statute (12 U.S.C. 1709(y)(2)), exceptions can be granted under either DELRAP or HRAP processing at the option of the requester, and in determining whether to allow such an exception, factors relating to the economy for the locality in which the project is located or specific to the project, including the total number of family units in the project, shall be considered. Comment: A commenter cites the example of Mortgagee Letter 2016-15, which will not have significant practical benefit for condominium associations. Opportunity for public comment could have prevented such an outcome, remedying limitations in this policy update. Comment: A commenter generally approves of the flexibility but notes that too many changes that create a moving target will frustrate board members and community managers. HUD Response: This final rule provides the framework to establish flexibility in applying the rule's standards through policy. HUD strongly believes that establishing the ranges in the regulation provides the flexibility it needs to effectively respond to market fluctuations while giving the public information about the limits of that flexibility. Enabling HUD to respond to market changes will benefit condominium communities. Standards for Flexible Ranges Comment: For the flexible ranges on commercial space percentage, FHA-insured percentage, and minimum level of owner-occupied units, HUD should broadly identify and provide more information on the factors it will consider and the criteria for recalculations when determining whether to increase or decrease the percentage limit. Knowing the factors HUD will consider when determining the percentage of allowable commercial space in a condominium project ahead of time will enable compliance and can assist homebuilders in designing condominium projects that will meet the needs of both commerce and consumers in general keeping with HUD's expectations. Also, HUD should provide additional clarity on the frequency of adjustments and the amount of notice that will be given prior to a change in the range. HUD Response: For changes to the applicable owner-occupancy percentage and commercial/nonresidential space percentage, factors that HUD will consider will include a portfolio analysis of default and claim rates of loans with similar attributes across different bands of owner-occupancy and commercial/nonresidential space percentages; analysis of condominium loans across geographical areas segmented by average owner occupancy ratios or average commercial/nonresidential space percentages; and an analysis of trends of financial stability of condominium projects in relation to each of the factors. For changes to the maximum FHA concentration, the analysis would also include analyses of FHA market share, analyses of default and claim rates by bands of percentages, analysis of FHA concentration percentages segmented by geographic area, and analysis of the performance of FHA condominium and single-family non-condominium loans. For single-unit approvals, data would include an analysis of single-unit approval loan performance versus loans in approved condominium projects, and analysis of single-unit approval loans across geographic areas and segmented by average owner occupancy ratios and financial stability. HUD may also consider additional data. These data points are also discussed in Section III of this preamble. Where a statistically significant deviation occurs over an extended period of time (typically enough time to identify a trend, which is often, but not always, in the 6-month to 1-year range), FHA would then consider making a change after factoring in the effects of any change in providing credit to borrowers that FHA programs were designed to serve and the impact to the MMI Fund. FHA would also look at the level of deviation to determine the level of any change. One aspect of analysis would be to compare default rates of the relevant factors across similar tier bands and make decisions based on those results so as to avoid excessive risk to the MMIF as compared to the overall market. Owner Occupancy Comment: While having too few owner-occupants can detract from the viability of a project, requiring too many can harm its marketability. The ratio based on primary, secondary, or investment property is still too high. This will not make it easier to get FHA approval. Comment: HUD should increase the minimum owner-occupancy ratio from 25 percent to 35 percent and should allow condominiums with fully funded reserves pursuant to a current reserve study to qualify for the exemption. HUD should include Real Estate Owned (REO) units and owner-occupied units in the ratio. This aligns with Fannie Mae and Freddie Mac and protects FHA's ability to play a countercyclical role in times of economic distress. Commenter supports the minimum acceptable level of owner occupancy at 35 percent. Comment: Data indicate that condo borrowers tend to have higher FICO scores than non-condo borrowers, and that since 2010 the default rate on condos has been lower than for non-condo loans. These facts support FHA allowing a lower percentage of owner-occupants. This commenter supports Mortgagee Letter 2016-15 allowing 35 percent and suggests that HUD should monitor the use of this threshold for existing condos to determine if more general application might be possible. HUD Response: HUD's final rule provides the framework to establish flexibility in applying owner occupancy standards through policy guidance as market forces may dictate, as well as address if such ratios vary based upon the construction status of the condominium. This final rule sets the lower range at which the minimum owner-occupancy percentage could be set at 30 percent. This is the current minimum occupancy requirement for new construction projects, and the lowest limit that HUD believes would protect the MMIF from undue risk. This standard does not seem to be having a negative effect on HUD's portfolio. Issuing a final rule with standards more restrictive than the ones currently in place, without strong justification supported by data, will create disturbance in the market, further impact development, and restrict access to affordable housing. Further, HUD must be able to set a standard that will accommodate recently completed and ready for occupancy projects, at which point a typical condominium project will not likely have sold all units to home buyers, or even a majority of its units. Comment: The proposed rule of a sliding owner occupancy rate of 25 percent to 75 percent would create additional work for the homeowners' association (HOA) and would be more harmful for condominium developments struggling to increase homeownership rates. One of the unfortunate effects of the 2008 housing crisis is the “death spiral” many condominium developments continue to struggle with. As mortgage delinquencies rose, so too did HOA fee delinquencies and foreclosures purchased by investors. This happened at the same time HUD tightened the FHA condo requirements. As homebuyers discovered more condo developments could no longer qualify for FHA financing, more investors bought the units to rent. This helped the Condominium Association financials, but the result was that more developments could not qualify under the 50 percent owner occupancy rule. Associations and homebuyers are looking to HUD and the FHA for clear and consistent rules, and only a flat 25 percent owner occupancy rate will provide this surety. The proposed sliding homeownership scale is anything but clear and consistent. Voluntary Associations will be less incentivized to seek FHA approval as this will cause more work for them to determine which percentage applies to them and if they qualify or not. Even worse, FHA requiring stronger financials to get a lower owner occupancy rate requirement only further depresses developments in communities that are still struggling to recover. This commenter vehemently disagrees with HUD's statement that the “current standard of 50 percent has worked in the recent market.” To the contrary, this standard has led to more condo units being sold to investors and pushing their developments farther from FHA qualification. The result is the reduced inventory for first-time homebuyers that has contributed to declining homeownership rates. HUD Response: The proposed range is designed to not only address current market conditions, but also to give HUD flexibility to act quickly to revise the percentage minimum in the future if market data indicates that this is necessary. This final rule revises the lower end of the standard to 30 percent owner occupancy, the current standard for new construction. This gives HUD sufficient room to reduce the requirement if analysis of the data indicates that the current minimum is too high. Comment: A proposed upper limit of 75 percent for a given project effectively would prevent homebuilders from completing projects, especially in areas of the country with high concentrations of investment properties and second homes. This would chill employment in construction and lead to negative economic consequences and a lack of choice for the consumer. Therefore, HUD should set the permissible percentage range between 25 percent and 50 percent. Comment: 75 percent would be too high an owner occupancy requirement, which would be an extreme outlier and would needlessly restrict the ability of owners to lease units, potentially forcing owners to sell units at discount prices while further jeopardizing consumer access to mortgage credit. HUD should reduce the maximum from 75 percent to no more than 51 percent. Many associations amended their condominium documents to meet the FHA 50 percent requirement; raising the percentage above 50 percent would put them out of compliance and affect financing options. Amending the condominium documents is difficult and expensive. This would impact projects that already spent considerable funds meeting the earlier guideline. Dropping the percentage to 35 percent will not make a big impact given the additional criteria, as few projects will be approved for that rate. Seventy-five percent is excessive and could create project delays impacting costs that would be passed on to consumers. HUD Response: The proposal regarding the range was designed to allow HUD to react quickly if future market conditions should warrant it. FHA will then establish the maximum limit within this range. Any proposed future changes to the range will have advance notice. Changes to the acceptable limit within the proposed ranges will be driven primarily by performance data for the Mutual Mortgage Insurance Fund. Such analysis may include: • FHA portfolio analysis of default and claim rates of loans with similar attributes across different bands of owner occupancy percentages. • Analysis of FHA condominium loans across geographical areas segmented by average owner occupancy ratios ( e.g., average owner occupancy ratios in metropolitan areas versus rural areas). • Analysis of trends of financial stability of condo projects in relation to owner occupancy ( e.g., relationship of default and claim rates when compared with percent of financial reserves and owner occupancy percentages). None of the requirements for owner occupancy maximum will require condominium association to update or rewrite their legal documents. Comment: The restrictions placed on approval for condominium projects with below 50 percent owner-occupancy levels are onerous and too restrictive. Pursuant to a recent Community Associations Institute study, 6 FHA's current requirement on reserves for projects with greater than 50 percent owner-occupancy was one of the leading reasons condominium projects were unable to obtain FHA certification. This requirement hurts the potential viability of condominium properties. If a building cannot be certified by FHA, it is more difficult for sellers of condominium units to find eligible borrowers. Often the seller's only alternative is to turn the unit into a rental, thus further lowering the owner-occupancy ratio. 6 Community Associations Institute, “Survey: Federal Housing Administration (FHA) Condominium Project Approval,” November 2016. HUD Response: The range provided in § 203.43b(d)(6)(ix) as it relates to owner-occupancy in a condominium project refers to a minimum requirement that HUD may establish within that range through notice. Historically, HUD has been the mortgage insurance provider for many first-time homebuyers and establishing a minimum owner-occupancy percentage protects the investment of new homeowners. In addition, HUD has a fiduciary responsibility to balance policy that promotes homeownership while protecting the Mutual Mortgage Insurance Fund. With this in mind, HUD's final rule provides the framework to establish flexibility in applying this standard through policy guidance as market forces may dictate. This final rule sets the allowable minimum percentage at 30 percent of the units. There may be times when a reduction in the owner-occupancy percentage is an appropriate action based on current market conditions and other contributing factors. HUD will consider the comments and recommendations when drafting the specific policy guidance on condominiums. Owner-Occupancy Minimum of 50 Percent Comment: HUD has provided no measurable rationale for the 50 percent requirement. In fact, both Freddie Mac and Fannie Mae have no such requirement when the property is being purchased as a primary residence. All FHA borrowers are purchasing a primary residence; their purchase will only help to boost the association's owner occupancy ratio. In this instance, an owner/occupancy requirement is counterproductive when a property meets all other certification requirements related to financial safety and soundness. FHA should remove the current owner-occupancy requirement and align with Fannie Mae and Freddie Mac policy by allowing lenders to review a condominium project in its entirety. Owner-occupancy levels, whether 100 percent or 0 percent, should be evaluated in conjunction with the project's reserves, delinquency rates, etc., to determine a condominium project's viability. HUD Response: HUD disagrees with the recommendation. HUD insures mortgages for properties that are primarily owner-occupied and has a statutory fiduciary responsibility to balance policy that promotes homeownership while protecting the Mutual Mortgage Insurance Fund. Eliminating the owner-occupancy requirement in its entirety solely based on the strength of the borrower has proven to be an unsound and inoperable financial policy for FHA. While Fannie Mae and Freddie Mac (Government Sponsored Enterprises or GSEs) do not impose owner occupancy restrictions for condominiums when the property being purchased is a primary residence, FHA serves a narrower band of borrowers that generally have credit profiles and equity positions below those that the GSEs permit. The final rule, however, provides the framework to establish flexibility in applying this standard through policy guidance as market forces may dictate. Comment: The current 50 percent threshold has not been a significant barrier to approval, save for limited circumstances such as developer-controlled condos or condos located in vacation or resort areas. However, greater flexibility would be welcome in this area. Lowering the current threshold below 50 percent would have a detrimental effect on approvals. The proposed regulation does not specify conditions in which FHA would consider raising the occupancy threshold from 50 percent to a higher range. Setting the occupancy below 50 percent would be detrimental to the commenter's clients. This comment supports a flexible range in the 50 percent to 75 percent range. Allowing a 50 percent owner/renter ratio is a valid, and sound practice. If it is too difficult for people to rent their condominium when life changes ( i.e., death, divorce, job relocation, new baby, etc.), the property values become depressed, which is bad news for borrowers and FHA. HUD Response: HUD's final rule provides the framework to establish flexibility in applying owner occupancy standards through policy guidance as market forces may dictate. To preserve flexibility and potentially accommodate recently completed projects, this final rule allows the possibility of a 30 percent owner-occupant minimum. HUD will consider the recommendations when updating future policy guidance. Owner-Occupancy Minimum Below 50 Percent Comment: 25 percent should be the owner occupancy percentage. Even lowering owner occupancy from 50 percent to 25 percent, there is still a Board of Directors of the owners that will be empowered with running the Association to the best of their ability. There is no risk to the FHA in making loans to borrowers in these condominium projects. The purchasers of these units, if they use FHA financing to purchase, will be owner occupants. Comment: To stabilize the financial viability and increase purchase options for FHA borrowers, two comments support a minimum level of owner-occupancy range between 25 and 50 percent, while certain exceptions could be made for lower percentages, or for extending the range to 75 percent, as proposed by HUD based on criteria dictated in ML 2016-15. HUD Response: The final rule establishes the owner occupancy range that provides the framework to establish flexibility in applying this standard through policy guidance as market forces may dictate. The comments and recommendations will be considered when updating and drafting the specific guidance for owner occupancy. Owner-Occupancy Requirement in Strong Rental Housing Market Areas Comment: HUD should eliminate ownership restrictions and occupancy requirements in an area in which rental housing is in strong demand. It makes no sense to penalize property owners who have tremendous value in their properties (as determined by strong rents and low vacancies) by not letting them sell them or finance them. In such areas, a rental property is worth a lot because there are so many prospective tenants and the rules for owner-occupancy do not work. Such properties may not be able to be sold because their value is too high to allow third parties to obtain financing. Comment: To reduce barriers to obtaining a reverse mortgage, make the owner-occupant requirement extremely low or non-existent (commenter states they are in an area where rentals are highly desired, and it will be impossible to meet HUD's owner-occupancy requirement for the building). HUD Response: HUD disagrees with the recommendation to eliminate owner-occupancy requirements. HUD insures mortgages for properties that are primarily owner-occupied and has a fiduciary responsibility to balance policy that promotes homeownership while protecting the Mutual Mortgage Insurance Fund. Eliminating the owner-occupancy requirement in its entirety solely based on the strength of the rental market in an area has been proven to be an unsound financial policy in the marketplace with respect to both forward and reverse mortgages. The final rule, however, provides the framework to establish flexibility in applying this standard through policy guidance as market forces may dictate. HOTMA and Owner Occupancy Comment: HUD should decrease allowable owner-occupancy limits from 50 percent to 35 percent without need for additional documentation as directed by Congress under the Housing Opportunities Through Modernization Act (HOTMA). HUD Response: HOTMA directed HUD to “issue guidance regarding the percentage of units that must be occupied by the owners” by October 27, 2016, or the 35 percent requirement to which the comment refers would have become effective. HUD issued Mortgagee Letter 2016-15 prior to the statutory deadline. That mortgagee letter is outside the scope of this rulemaking, which provides for a percentage of owner occupancy as low as 30 percent. However, HUD will consider this comment as well as then-current market conditions in future adjustments to the percentage within the range of 30 percent to 75 percent allowed by this final rule. Secondary Residences Comment: In prior years, HUD allowed secondary residences to count as owner occupied. With issuance of ML 2009-46B and 2011-22, HUD allowed a second home to count as owner occupied only if it was a secondary residence with an FHA loan under 24 CFR 203.18(f)(2). A commenter states that 24 CFR 203.18(f)(2)(iii) relates only to the maximum FHA loan amount (24 CFR 203.18 “Maximum Mortgage Amounts”) for a “second FHA loan” in the sole event that an owner with an existing FHA loan faces “undue hardship” and needs to obtain a second FHA loan on another unit in certain circumstances. Comment: HUD's reference to the definitions of principal and secondary homes in 24 CFR 203.18(f)(1) and (2) carries an implication that the secondary residence must have an FHA loan on it in order to be counted in the owner-occupancy ratio. It does not mean that a unit with a conventional second loan (or even a unit that is mortgage free), either of which are secondary residences, should not be counted as owner occupied. In the recent past, HUD again reversed its decision and now allows secondary residences to count as owner occupied (as does Fannie Mae). Because of its reference to 24 CFR 203.18(f)(2), it is unclear as to what the Proposed Rule's intent is. Please state unequivocally and unambiguously that secondary residences count as owner-occupied, and/or that all residences which are not investor-owned or vacation homes count as owner-occupied, and/or also please state separately the definitions cited in §§ 203.18(f) (1) and (2) and omit (f)(2)(iii). Comment: 24 CFR 203.18(f)(2)(iii) relates only to the maximum FHA loan amount (24 CFR 203.18 “Maximum Mortgage Amounts”) for a “second FHA loan” in the sole event that an owner with an existing FHA loan faces “undue hardship” and needs to obtain a second FHA loan on another unit in certain circumstances. HUD should establish a revised owner-occupancy calculation based on the number of the minimum allowable investment units rather than based on a subdivision of classifications for owner-occupied units, investor units, vacation homes, etc. This revised grouping would make it easier for lenders to distinguish and track the number of primary, secondary, and investor held units. Currently, lenders face significant challenges in distinguishing secondary residences from vacation homes and investor-owned units, and struggle to accurately validate and monitor these units in approved projects. By classifying units as (1) primary residences; (2) secondary residences; or (3) investor units, in line with GSE industry standards and removing the need to distinguish vacation homes from secondary residences, which most associations are not equipped to track, lenders will be able to more accurately track owner-occupancy levels and FHA will be able to better manage default risk in approved projects. HUD Response: HUD recognizes the concern with the reference to Secondary Residences, which term is unique to FHA insured mortgages. FHA had previously addressed this issue in Mortgagee Letter 2015-17 (ML 15-17), whereby FHA indicated it would consider a property as owner occupied provided it was not “Investor Owned” for the purpose of calculating owner occupancy ratios for Condominium Project approval. However, in accordance with the Housing Opportunity Through Modernization Act (HOTMA), which was signed into law on July 29, 2016, the National Housing Act was amended to require HUD to use properties which were either principal residences or Secondary Residences “as such terms are defined by” HUD (or sold to owners who intend to meet such occupancy requirements) to establish HUD's owner occupancy requirements. As required by HOTMA, Mortgagee Letter 2016-15 replaced the requirements in ML 15-17 with the current percentage standard. Currently, HUD's definition of “Secondary Residence” is found in 24 CFR 203.18(f), and, as noted in the comments, has three elements: It is (1) part-time abode where the mortgagor typically spends less than a majority of the calendar year; (2) not a vacation home; and (3) the Commissioner has determined it eligible for insurance to avoid undue hardship to the mortgagor. These standards, particularly (3), are addressed to eligibility for mortgage insurance in accordance with Section 203(g) of the National Housing Act. This rule relates to the approval of the project to participate in the mortgage insurance program; specifically, the issue of Secondary Residences comes up with respect to the owner-occupancy percentage. In the context of project approval, as comments noted, (3) does not make sense; it is an assessment that will be made if the mortgage on the unit is submitted for insurance after the project is approved to participate. Additionally, HUD recognizes the exclusion of vacation homes, while necessary for the definition found in 24 CFR 203.18(f)(2) to conform with the requirement in section 203(g)(1) of the National Housing Act, 12 U.S.C. 1709(g)(1), is not necessary to calculate owner occupancy rates of condominium projects for project approval purposes. For this reason, this rule states that for project approval, any unit in which the owner resides as his or her place of abode for any portion of a calendar year other than as a principal residence, and that is not rented for a majority of the calendar year, counts towards the owner-occupied percentage. Individual mortgages on units in approved projects would still have to meet HUD's rules, regulations, and underwriting requirements, as applicable, to obtain insurance on their mortgages. Percentage Ranges for Commercial/Nonresidential Space Commenters Stated That HUD Should Not Impose a Limit on the Percentage of Commercial/Nonresidential Space Comment: The economically optimal mix of residential and commercial will differ both by the project and by the community. Any such restriction on uses can only reduce the economic value of projects; it can never enhance it. For the purposes of underwriting, any limit on the mix of uses in a mixed-use project is counterproductive and should be eliminated from the proposed rule. Second, from a public health perspective, there is a need for more mixed-use projects in our towns, cities, and suburbs. Mixed-use developments greatly enhance the walkability of neighborhoods, which in turn promotes health and well-being through more frequent social interactions, more walking, and reduced crime. It should not be the role of HUD to place limits on mixed-use projects via rulemaking. Comment: Mixed-use commercial/residential spaces are the cornerstone of traditional small-town America. Preserving the ‘residential characteristics' of a condominium is done at the expense of creating a walkable neighborhood. People should be able to apply for help to build or renovate residences even if those residences are part of a building that is more than 50 percent commercial. Rather than protecting the “residential character” of condominium projects, the focus should be on underwriting standards that are more directly related to creditworthiness of the individual. Federal regulations must support mixed-use rental housing for affordability and walkability. Comment: Commercial space would not harm the project's financial viability. Many of the nation's most successful and in-demand mixed-use neighborhoods are comprised of such projects. Increased HUD flexibility regarding the amount of commercial space in multi-family buildings would help to grow and expand mixed-use development efforts, specifically in areas targeted for redevelopment. Furthermore, HUD should review its criteria for all its programs so that they better reflect growing demand for walkable, mixed-use communities; conform to the overall goals for mixed-use, sustainable communities outlined in the Administration's Sustainable Communities Initiative; and bolster rather than stymie local government efforts to preserve and grow the stock of affordable housing in neighborhoods that include mixed-use buildings. HUD Response: HUD agrees that mixed-use developments that combine commercial enterprises with residential housing are increasing in popularity. 7 HUD notes that Fannie Mae recently increased its allowable commercial space percentage to 35 percent. 8 With a strong demand for residential units in mixed-use projects within and outside urban settings, the percent of commercial/nonresidential space becomes less concerning if there is no other negative impact on the residential character and financial stability of the project. 7 Real Trends: The Future of Real Estate in the United States by Urban Economics Lab and MIT's Center for Real Estate (October 2017), at 19. The study is available at https://mitcre.mit.edu/wp-content/uploads/2017/10/REAL-TRENDS-MIT.pdf. 8 Fannie Mae Selling Guide B4-2.1-03: Ineligible Projects (6/5/2018), available at https://www.fanniemae.com/content/guide/selling/b4/2.1/03.html. This final rule provides a sufficient range to allow adjustments that may be necessary for the foreseeable future. HUD disagrees with the suggestion that HUD should not impose any upper limit on the percentage of commercial/non-residential space an acceptable project may have. HUD insures mortgages for properties that are primarily residential in nature and has a fiduciary responsibility to balance policy that promotes homeownership while protecting the Mutual Mortgage Insurance Fund. Alternative Suggestions as to the Amount of Commercial Space That Should Be Approvable Comment: Commenters support the expansion of allowable commercial space to the proposed range of 25 percent to 60 percent. This range, when combined with a look at local economic factors, would allow more associations to qualify for FHA approval without necessarily increasing risk. More and more jurisdictions are fostering walkable, transit-oriented communities that offer a blend of commercial and residential space. This change would align FHA with emerging market preferences. A commenter notes an example of a mixed-use development that is highly vibrant and desirable, but would not be approved by FHA because the commercial space exceeds 30 percent. Comment: The maximum standard for commercial space should be set and maintained at 60 percent of the total floor area in § 203.43b(d)(6)(vii). Many highly successful mixed-use neighborhoods are comprised of a similar commercial space to residential space ratio, and there is a real demand nationwide for development of such projects. If financing were made more readily available, it would have nothing but a positive impact on communities across the nation. This commenter stated disagreement with HUD's assessment of potential negative impacts on the residential character of mixed-use developments with greater than 50 percent of total area designated for commercial space. Comment: The rule should maintain the current commercial/nonresidential space requirements, which are consistent with National Association of Builders policy that calls for the allowable percentage of nonresidential space up to 45 percent. Setting a limit too high could impact the residential character of a project and expose FHA-insured units to risk should a commercial tenant leave the project. Mortgagee Letter 2012-18 provides flexibility and HUD should maintain these requirements. Comment: The commercial space requirement should be set between 25-50 percent, with specific guidelines to allow exceptions for projects with up to 60 percent commercial space. Special consideration is needed when a project seeks to use more than 50 percent of a property's total floor area for commercial space due to the potential impacts of this expanded presence on the characteristics of a residential project. Comment: Mixed-use neighborhoods are preferred, and 56 percent of millennials and 46 percent of baby boomers prefer to live in areas with a mix of retail and housing options (Regional Plan Associations, “The Unintended Consequences of Housing Finance,” February 2016). Mixed-use neighborhoods have held up their value better in the years following the Great Recession compared to solely residential neighborhoods. Given FHA's mission to promote safe and affordable housing, the current policy limiting commercial space hinders efforts to build neighborhoods that have a mix of residential housing and businesses with access to public transit that HUD has championed. FHA should allow up to 45 percent commercial space without documentation. Greater levels of commercial space should be evaluated holistically along with the strength of the project, but should not be capped at a specific percentage. Comment: To expand the pool of eligible projects, HUD should set the minimum range for commercial/non-residential space without requiring an exception from the current 25 percent to 35 percent. Projects with commercial space of more than 35 percent but less than 50 percent may request exemptions pursuant to FHA criteria subject to proposed §§ 203.43(f)(1) and (2). Comment: Increasing the percentage of permissible commercial/nonresidential space prior to triggering an exception request builds on FHA's experience with the exception structure currently enforced in the Guide that permits the jurisdictional Homeownership Centers (HOCs) to consider and approve exemptions for projects with commercial space that exceeds 25 percent but is less than 35 percent of total floor area. Protecting a project's residential use and character is not exclusive of consumers who view access to a broad array of services within a project as a fundamental component of the project's residential use and character. Many consumers place a high value on immediate access to services. For these consumers, commercial space is a meaningful component of enhancing the residential experience and a motivation to purchase. Comment: An upper limit of 50 percent should be set for the range regarding commercial space. A higher percentage threatens the residential nature of a project and too closely ties the residential viability to the project's commercial success. HUD should continue to use the standard of 25 percent while exercising the ability to increase that threshold for certain markets or projects as proposed in the regulation. Comment: It is possible for a project with commercial space exceeding 50 percent of total floor area to be successful in certain housing markets. Any exceptions granted above the 50 percent limitation must appropriately mitigate potential exposure to business cycle risk. At this time, it may not be appropriate for FHA to approve condominiums in the upper limit of the proposed 60 percent commercial space range—the agency lacks data and experience concerning the sustainability of such projects. This is not the case for projects with 35 percent or less commercial space. Comment: Older business/residential buildings help entrepreneurs live upstairs from their businesses. HUD should lift the minimizing constraints of space versus funding. HUD should consider doing a survey on said remodeling of old tenements/downstairs businesses. All old buildings need new life for sustainable development. Comment: Research shows that consumers increasingly place a price premium on housing that is near (walking distance of less than .25 miles) of services, including retail, healthcare, and transportation. This research has also shown a correlation between a homeowner's access to transportation, employers, and household economic growth. Condominium projects with commercial components not only meet consumer demand for access to services, but also may improve access to jobs leading to greater financial stability for households and the community at-large. 9 9 Richardson, Nela, Urban Institute/Core Logic: Demand, Data, and Demographics Symposium, Integrated Services and Inclusionary Housing for Changing Demographics: Can we build our way out of this? (Washington DC, November 2, 2016). Data deck available for download at: http://www.urban.org/events/data-demand-and-demographics-symposium-housing-finance-2 (accessed 3/18/2019). HUD Response: This final rule narrows the upper end of the potential allowable commercial space percentage to 55 percent of the total floor area. This percentage acknowledges the future potential of mixed-use developments while avoiding risk to the MMIF. The range gives HUD flexibility to adjust the standards through policy changes as the market conditions dictate. HUD believes in allowing the development of pedestrian oriented communities that offer the convenience of commercial and residential space in the same project, so long as the residential character is not negatively impacted. Multiple commenters seem to agree with HUD's assessment, noting that although they also agree with the expanded range of allowable commercial/non-residential space, special consideration is warranted when a project seeks to use more than 50 percent of a property's total floor area for commercial/non-residential use. HUD will consider the recommendations submitted through the comments when drafting specific policy guidance on this subject. Comment: The HOTMA provision allowing lenders to make exceptions to the commercial space requirement based on “factors relating to the economy for the locality in which such project is located” should be immediately implemented (the deadline was October 28, 2016). HUD Response: This provision was proposed on September 28, 2016 (81 FR 66565) and is made final by this rule (§ 203.43b(g)(2)). Comment: Most of the newer condominium projects that have been built in the past 5 years in one area include street level commercial space. To disqualify the ability of a purchaser to purchase a condominium in this building using FHA financing due to current commercial space vacancy (assuming this is a temporary short-term vacancy) does not make sense. HUD should set this minimum occupancy rate of commercial space at 25 percent. HUD Response: The rule establishes the range for commercial space, but does not impose a restriction on commercial space vacancy. As to the percentage, please see the prior response. Comment: HUD should clarify that this requirement is not a minimum, but an allowable maximum for the addition of commercial space as well as the frequency with which FHA will reexamine the commercial space requirement, how much notice will be provided to lenders when a change is made, and what criteria will be used to determine recalculations. Finally, FHA should further define the items that may contribute to commercial space to ensure that lenders understand what features will fall into this category to aid in the completion of accurate commercial space calculations. HUD Response: The range provided in § 203.43b(d)(6)(vii) as it relates to the commercial/non-residential space in a condominium project refers to an allowable maximum, not a minimum requirement. Regarding the commenter's request for additional information on guidelines, procedures, and items that contribute to commercial space, HUD expects to issue future guidance on such issues. Section III of this preamble discusses data that HUD will consider when determining a change in the percentage of commercial/nonresidential floor area. Single-Unit Approval and Reserve Requirements Comment: Single-unit approvals offer millennials an opportunity to own homes, and the elderly to stay independent, especially if the reserve requirement could be set lower than that of Fannie Mae, perhaps 10 percent of the overall budget instead of 10 percent per annum. If the project is budgeting properly, it always has the appropriate amount to cover its expenses already on hand and it doesn't make sense to put in an additional 10 percent each year. Comment: HUD should consider an exemption from the reserve requirement for single-unit loans where a project has been well-managed for decades, while approaching the capital funding issue via special assessments. HUD could use appraisers to speak to the historical values of units within the complex. If one could determine that the price variance is too high to meet a certain standard, then the exemption is not granted. HUD Response: This rule does not impose a minimum reserve requirement for single-unit approval, but establishes a framework for single-unit approval that utilizes the eligibility requirements in 24 CFR 203.43b(d) as a baseline, which includes requirements for reserves; or a subset of these requirements. HUD will consider these comments when addressing single-unit approvals in future notices. FHA Concentration Percentage Comment: HUD, through FHA has a responsibility as a steward of the program to mitigate risk. Without further clarification as to existing risk or the rationale for potentially reducing or expanding the concentration limits, it is difficult to provide substantive comment. However, HUD is a critical source of funding for buyers in condominiums, and HUD should not lower the concentration threshold from its current 50 percent level without adequate data to support such a contraction in the program. Existing levels should be preserved with greater flexibility for increased concentration where appropriate. If HUD determines that changes are warranted, HUD should provide additional information about the factors that will be considered. Comment: 25 percent FHA insured would be too low. HUD should not be overly concerned about FHA concentration in projects that are well-managed and meet all FHA approval criteria. Some limitation is prudent risk management. HUD should retain a 50 percent minimum FHA concentration limit. HUD should maintain its current guidelines to allow for 50 percent of the total number of units in a project with some leniency to allow for potential cancellations. In many circumstances, HUD has already allowed for up to 75 percent FHA financed units in established projects based on individual project conditions and the associated risks of this flexibility are monitored and mitigated through the recertification process. The maximum percentage should be raised to 75 percent. The flexibility provided under current guidelines along with the sufficient risk mitigation provided through the recertification process remains the most effective approach to this calculation for both lenders and FHA. HUD Response: This final rule implements the FHA concentration range that provides the framework to establish flexibility in applying this standard through policy guidance as market forces may dictate. HUD will evaluate these recommendations when updating policy guidance and will consider pertinent data to support any future changes to the concentration limit. Comment: A commenter recommends that HUD allow an FHA concentration up to 100 percent, especially for new construction. In most metropolitan areas, the cost of a condominium is significantly less than a traditional single-family home. FHA is often the only financing available for many buyers, especially first-time or middle-income homebuyers who have limited resources for a down-payment. Research shows that the time needed to save for an FHA related down payment is significantly higher for a single-family home compared to a condominium. Purchasing a condominium will allow many FHA borrowers faster access to homeownership, helping to build their wealth and stabilize their living situation sooner rather than later. A high concentration of FHA borrowers means a high concentration of owner-occupants, which helps the financial soundness of the condominium project. FHA does not limit the amount of financing available within a neighborhood of single-family structures, nor should FHA limit financing within a condominium project. Generally, FHA condominium buyers have a stronger financial footing than non-condominium buyers. FHA condominium buyers tend to have higher FICO scores than the non-condominium buyers and higher monthly incomes. In 2016, the average monthly income for a condominium buyer was $1,693, versus $1,397 for non-condominium buyers. 10 These are creditworthy borrowers who deserve to live in buildings and communities that meet their needs. 10 Urban Institute, “Loosening FHA Restrictions on Condominium Financing Makes Sense,” November 2016, available at https://www.urban.org/sites/default/files/publication/85936/loosening-fha-restrictions-on-condominium-financing-makes-sense.pdf. HUD Response: HUD disagrees with the recommendation to increase the maximum allowable FHA concentration percentage to 100 percent. HUD has a fiduciary responsibility to balance policy guidance with risk to the Mutual Mortgage Insurance Fund. Allowing for a higher FHA concentration percentage without careful consideration for additional requirements or justification may increase the Government's risk. Single-Unit Approval Single-Unit Approval Generally Comment: Single-unit approvals should be allowed in buildings that do not meet current requirements, for example, if the owner-occupant percentage is too low, single-unit approvals could provide a way for the development to build up to the required percentage. With only 9,866 condominium projects currently on FHA's approved list (of 150,000 nationwide), access to condominium units with FHA-insured mortgages is limited. Allowing single-unit approvals could greatly improve access and “change the trajectory of the FHA condominium approval trend line” to the benefit of condominium associations and consumers. Comment: Most developments fail to keep their FHA approval because it is not in their budget and most do not have the knowledge and expertise to keep the project approved. By eliminating this process, developers would be able to serve more borrowers that are looking to use FHA financing to accomplish their goal of homeownership. HUD Response: Single-unit approvals, in the appropriate circumstances, can be beneficial, and are retained in this final rule as an opportunity to provide access to FHA's programs in this or similar situations. The rule establishes requirements to mitigate risk to the Mutual Mortgage Insurance Fund, while providing that these can be varied in the future as needed. Comment: Because of the reluctance of condominium associations to become HUD-approved, single-unit approval is imperative. HUD should reconsider requiring any complex that shows up on HUD's approval list to go through project approval. That will require many of these associations to be approached a second time when many of them had a bad first experience. HUD Response: HUD has a fiduciary responsibility to the Mutual Mortgage Insurance Fund that generally precludes allowing single-unit loans on any project, although the rule provides a framework for HUD to vary single-unit approval requirements as needed to meet market needs. Comment: To make single-unit approval as successful as it could be, HUD should do away with “loophole letters,” because the property manager can refuse to provide one and kill the loans that would otherwise happen. HUD Response: The comment seems to be referring to a questionnaire that is sent to the Association. HUD appreciates that obtaining information from Condominium Associations can complicate the mortgage process, but recognizes that such information may not be obtainable through other methods. While this rule does not mandate that any specific questionnaire be completed by a Condominium Association, this rule provides the framework to establish flexibility in applying the proposed standards through future policy guidance as market forces may dictate. Comment: The current approval process has incentivized condominium boards to undertake an examination of the Association finances, state of insurance policies, collections, and other factors that are needed to obtain approval. This has been beneficial to communities who have undertaken this process. Providing an approval process with a lower approval threshold will short circuit the larger project approval process as boards will forego the time and effort of project approval knowing there is a lower barrier for approval elsewhere. This would be unfair to the communities which have undertaken project approval and provide a dueling set of standards. HUD Response: Providing for a limited number of single-unit approvals, based on standards appropriate to mitigate against excessive risk, should not affect the fairness of the overall project approval process. Limiting the number of such approvals in projects provides incentive for Associations to continue to pursue the project approval process in projects that typically have a larger percentage of FHA financing. The increased flexibility to meet market needs and enlarged approval period provided by this rule is expected to increase the number of eligible mortgages in Condominium projects. The lower end of the range, including a 0 percent maximum, is available if overly negative effects occur. However, smaller condominium projects may simply not have the financial ability or expertise to apply for project approval, and a limited number of Single-Unit Approvals would give them a path forward to provide FHA mortgage-insured housing units. Project approvals will have benefits, including a degree of certainty that units will be eligible for mortgage insurance; therefore HUD believes those projects with the ability to do so will continue to seek project approval. Comment: The previous spot loan program led to concerns of abuse. This program should have diligent monitoring and adequate system enhancements to prevent abuses. Without further guidance and clarity regarding lender obligations, the criteria that will be used for unit approval verification, and the processes that will be in place to monitor and track these unit approvals, this program may result in unintended risk to the Mutual Mortgage Insurance Fund, and to borrowers seeking sustainable homeownership. FHA should implement a limited review process for single-unit approvals and a screen within FHA Connection to collect data for FHA on spot approvals to help FHA monitor and manage these risks. Based on the current proposal, a condominium identification number would not be available for a single unit, and without effective monitoring systems, both FHA and participating lenders will have significant difficulties determining approved unit percentages in an ineligible building. There should be a way for the public to track percentages of single-unit approvals. HUD should clarify the tracking mechanism to be used to determine compliance with the 0-20 percent range allowed. HUD Response: HUD agrees that a reliable tracking mechanism is needed to determine compliance with the range allowed. As a result, HUD has added a provision that “HUD may suspend the issuance of new FHA case numbers for a mortgage on a property located in any project where the number of FHA-insured mortgages exceeds the maximum,” which will allow FHA to proactively manage the concentration range. The maximum percentages that apply will be established by notice. Also, the 0 percent possibility provides a safety valve. This final rule provides specific criteria for single-unit approval that HUD believes will adequately protect the Mutual Mortgage Insurance Fund, while providing needed flexibility for HUD to make changes in the future as needed. Comment: Single-unit approval should not undermine the project approval process and should be limited. While the FHA and industry have struggled with encouraging boards to undertake project approval, the importance and benefits of approval have become more widely understood over the past few years. Adopting a shortcut will undermine the process unless more clearly delineated limitations are adopted. If the criteria for single-unit approvals is extremely loose, HUD will lose control of the process and lenders will turn to single-unit approval as the industry standard. A comment proposed that single-unit approval would be acceptable if: (1) The association had held FHA approval which has been expired for fewer than 3 years. (2) The FHA approval was not withdrawn or rejected for failure to meet FHA criteria. (3) Other criteria FHA deems appropriate. Another comment stated that there should be some leeway and suggests that the following common issues should be considered to determine what is required for single-unit approval: • Construction Defect Litigation or repairs in response to defect litigation are still in process. • Owner Occupancy is between 35 percent-50 percent. • Leasing Restrictions that include: Seasoning Clauses, Tenant-Screening, short-term Rentals. • Co-Insurance is used without 100 percent replacement cost, but replacement cost can be validated using Marshall-Swift or other acceptable means. • Bylaws are not signed. • Status with the Secretary of State is not current. • Condominium Documents were not created and or filed properly at the time of development. • Transfer fees are in place. HUD Response: HUD has considered these suggestions and believes that the limitations stated in this final rule are appropriate. Single units, to be approved for mortgage insurance, must not be either in a project that is already approved, or a project that has been determined to have significant issues that affect the viability of the project. The unit must meet the general standards for approval stated in the rule, or some subset of these standards, or less stringent standards, determined by HUD. The unit must be in a completed project that has at least 5 dwelling units. HUD plans to issue further guidance under the framework provided in this rule. Comment: HUD should define and clarify the documentation requirements for approvals under the exception for less stringent standards. HUD Response: The less stringent standards will be determined based on experience and conditions at the time. Comment: HUD should allow public comment on the specific criteria and processes FHA will use to manage single-unit approvals prior to implementation. The actual standards and process that FHA adopts are critical to the success of single-unit approvals. If a single-unit approval system is to be successful, all market participants (including lenders, condominium association boards, community managers, community management companies, and other professionals who support the community association housing model) must have the opportunity to review and comment on the procedures and standards to be used. Comment: HUD should consider adopting Freddie Mac and Fannie Mae's guidelines when it comes to condominiums, that is, limited review and full review for “spot approvals” for condos not listed on the Fannie Mae PERS list. Freddie takes the reciprocal of Fannie Mae's PERS approval. Review should be similar to the Fannie Mae Condo Project Manager (CPM) review (reviewing the budget, delinquencies, litigation, etc.) for the single unit only. HUD would benefit from the same level of review as the agencies and set the same protocol for certain type that would need HRAP or DELRAP approval as Fannie does with PERS. Having FHA, Fannie and Freddie all on the same page when it comes to condominium reviews will give more flexibility to certain credit type borrowers, along with product options. If there is no guidance, some lenders may approve anything without any type of review and consider the unit acceptable as long as it is not on HUD's approved list. Perhaps HUD could have a list of staff trained in condominiums within each lender, or only allow DELRAP-approved lenders to issue Single-Unit Approvals. HUD Response: HUD has considered these suggestions and believes that the limitations stated in this final rule are appropriate. Single units must be in projects that meet eligibility criteria and cannot have any significant issues affecting viability. HUD plans to issue further guidance under the framework provided in this rule. HUD has received a number of comments on criteria for Single-Unit Approval via this rulemaking, which it will consider when issuing guidance going forward. Single-Unit Approval and FHA Concentration Comment: Is there any relationship between the number of Single-Unit Approvals and the percentage of FHA-insured loans currently in the project? HUD Response: Generally, the projects in which SUAs will occur must meet the eligibility requirements of § 203.43b(d) and (i), which place a limit on the percentage of FHA-insured loans. This rule provides that HUD may vary the specific limit, giving HUD the flexibility to respond to market needs; the total FHA insurance concentration will include all FHA-insured mortgage loans in the project, whether counted for SUAs or the overall limit. Comment: The FHA concentration range proposed for the SUA process is the only factor that raises the possibility of severely restricting the program on a broad basis or targeting a sub-set of projects for disqualification from the underlying program. FHA now has greatly improved risk management due to improvements in data collection and the Qualified Mortgage standards (of the Dodd-Frank Wall Street Reform and Consumer Protection Act). Currently, condominiums outperform most other categories in FHA's book of business and have a lower foreclosure rate, which would allow HUD to expand access to credit while protecting the insurance fund. A minimum FHA concentration range of 0 percent is contrary to this policy goal, and could lead to a practical withdrawal of FHA from the condominium market, which would be destabilizing and contrary to FHA's countercyclical role in any future crisis to the detriment of American homeowners and communities. The lower end of the range should be 10 percent. HUD Response: HUD recognized the need to establish a limited Single-Unit Approval process in its proposed rule and maintains that process through this final rule. HUD also recognizes that the performance of mortgages secured by condominiums had performed worse than other single-family mortgages for a time period prior to the elimination of FHA's Spot Approval process and have shown to be prone to more volatility than other mortgages. Establishing a range that includes 0 percent provides FHA with the necessary flexibility to respond to market movements that may put the FHA Mutual Mortgage Insurance Fund at risk. Single-Unit Approval With Home Equity Conversion Mortgages (HECMs) Comment: Seniors face difficulty in obtaining HECM loans due to the inability or unwillingness of condominium associations to have the projects approved by FHA due to the difficulty, time, and expense of the project approval process, without a single-unit option. In some cases, HECM loans are the only way seniors can stay in their home in retirement, or need the cash flow. A single-loan approval process would make it relatively simple for individual units to be approved. HUD should allow Single-Unit Approval for a reverse mortgage in any condominium complex that meets the new Single-Unit Approval criteria. Eligibility for a HECM loan should be based on individual creditworthiness rather than the condominium association. The current requirement for whole-project approval is a form of discrimination because a detached homeowner who isn't credit worthy can more easily get a HECM loan than a highly qualified senior owning a condominium. “Overly aggressive” HUD requirements prevent highly qualified borrowers from qualifying for loans, and HUD should go back to spot approvals based on appraiser input of marketing data. “The local appraiser's input would properly evaluate the short and long-term viability of the project.” When HUD ended spot approvals, HECM loans became inaccessible to many seniors. HUD should clearly include HECM loans within the Single-Unit Approval process. The policy that HECM loans are not eligible has to do with consistency with the prior policy of terminating spot loan approvals. The program currently prevents highly qualified borrowers from qualifying for loans and fulfilling the objective of the HECM program. It is a form of discrimination. HUD Response: While HUD does not agree that either a lack of single-unit loan approvals for HECMs or a general requirement for project approval are forms of discrimination, the availability of Single-Unit Approvals under this final rule should make HECM loans in condominium projects more widely available while recognizing the difference in ownership of single-family dwellings that are maintained solely by the owners versus condominium ownership that includes maintenance by owners and associations. HECM mortgages may include condominium loans (see the definition of “mortgage” in 24 CFR 206.3) and are eligible for mortgage insurance if the project is acceptable to the Commissioner (24 CFR 206.51). For HECMs, as for forward mortgages, a condominium loan is approvable for insurance if it satisfies eligibility requirements and is: (1) Located in a project that is acceptable to the Commissioner as described in § 203.43b(d) of this rule, (2) for a single condominium unit located in a project that is acceptable to Commissioner as described in § 203.43b(i) of this rule, or (3) for a site condominium project that is acceptable to Commissioner as described in § 203.43b(j) of this rule. The requirements of § 203.43b of this rule establish the standards for a project that is acceptable to the Commissioner. Comment: Condominium associations often are not interested in becoming HUD-approved, and therefore they could not obtain a reverse mortgage. This is a common situation (one commenter stated that only 6-8 percent of condominium projects are HUD-approved), resulting in an underserved market. Some commenters stated that seniors were being discriminated against, and that seniors in condominiums unfairly lack the same opportunities provided to those who live in single- family homes, even if the condominium owners are more creditworthy. These commenters sought the ability to obtain reverse mortgages, which would allow seniors to live near relatives but keep their independence, and stated that there should be an easier way than getting the entire project approved. This rule would “re-open doors in a fiscally responsible manner for many people that have been closed for too long.” A senior with a tax lien against a mortgage-free condominium unit would likely not be able to pay the taxes past due without a HECM loan. Some housing markets have become so expensive that even small condos are out of reach of many seniors if they are not able to use a reverse mortgage. Many seniors already in a condo need to access their equity for everyday living, medical and other expenses and long-term care. When some large banks left the reverse mortgage industry, the market lost their dedicated in-house condominium departments, which worked solely on getting condominium projects approved. More and more condominium associations do not want to go through the time and expense of getting approved. Single-unit loans should come back so that older Americans can enjoy staying in their home in retirement. HUD Response: The Single-Unit Approval process under this rule is expected to make units more easily available, including for HECM loans. Comment: HUD should allow a certain percentage of Single-Unit Approvals for reverse mortgages in any complex, or, in the alternative, HUD should consider wiping the project approval database for any complex without a status change in 2 years. HUD Resp onse: HUD does not believe allowing a certain percentage of Single-Unit Approvals solely for HECM loans in all projects would be consistent with its fiduciary duty to the Mutual Mortgage Insurance Fund. HUD believes that making the determination of how many units would be Single-Unit Approvals based on specific factors, experience, and with flexibility to change in response to future market conditions is the correct approach. For the same reason, HUD would not agree to wipe the approval database at any periodic intervals. Comment: The ability to apply for a HECM loan based on individual viability rather than blanket rules applicable to a whole complex is much more democratic and would logically help the economy and give more people cash flow. Allowing single-unit loans will also help the values of these condominium projects. HUD Response: HUD has a fiduciary responsibility to the Mutual Mortgage Insurance Fund that generally precludes allowing single-unit loans without considering the project. The rule provides a framework for HUD to provide some Single-Unit Approvals and to vary requirements as needed to meet market needs. Direct Endorsement Lender Review and Approval (DELRAP) Commenters Questioned the Proposed Staff Experience Requirement for DELRAP Approval Comment: It is often standard practice for a lender to employ junior underwriters with respect to condominium projects who may not have at least one year of experience, but who work under the direct supervision of a very experienced senior underwriter. Procedures are already in place to oversee this current system through FHA's quality control reviews. Accordingly, HUD should instead utilize the current guideline requirements with respect to this issue, which call for the lender to employ staff that have knowledge and expertise in reviewing condominium projects. Supervision by a senior underwriter and internal quality controls allow for underwriters with less than a year experience to work on a project while protecting consumers and the FHA. Because each lender is responsible for the outcome of each reviewer's actions, it is best left to each lender to determine if/when a reviewer is ready to make these important decisions. HUD should make no changes to current guidance. Comment: HUD should consider if the proposed credentialing process constitutes a barrier to entry, depressing the number of lenders eligible to process DELRAP approvals. DELRAP serves the useful purpose of increasing administrative capacity when there are bottlenecks. Such administrative capacity constraints may occur when the market is very active or when new regulatory standards are introduced. The reduction of DELRAP approvals could have negative implications for FHA's countercyclical role in the housing finance system. FHA played a critical countercyclical role in the recent financial crisis, making mortgage credit available to households, including condominium households, and accounting for 26 and 22 percent of condominium unit market originations in 2009 and 2010, respectively. Direct Endorsement lenders should be provided unconditional approval, with the understanding that qualified personnel will process condominium approvals, unless or until FHA quality control reviews identify a pattern or practice of DELRAP approval violations. Providing a list of material deficiencies found would help lenders prevent returning from unconditional DELRAP authority to a conditional status, or worse, a termination or other action. If a Direct Endorsement lender has pattern of negative DELRAP outcomes, it would be appropriate for the Department to impose the proposed additional requirements to retain DELRAP authority at that time. This has the benefit of clearly communicating FHA expectations, which will improve the quality of DELRAP approvals and retain the efficiency of the DELRAP approval process for FHA in periods of economic stability and distress. HUD should review initial DELRAP approvals and engage in continued quality assurance reviews. Greater Direct Endorsement lender participation resulting from fewer barriers to entry in the project approval process, buttressed by the potential of penalty for non-compliance, benefits both condominium households and FHA. HUD Response: This final rule revises § 203.8(b)(1)(iv) to clarify that staff members that participate in the approval of a Condominium Projects using DELRAP authority must have at least one year of experience in underwriting mortgages on condominiums and/or condominium project approval or be supervised by staff that meet such experience requirement. Also, in appropriate circumstances, such as where a lender has significant experience through the existing program, this final rule provides flexibility for HUD to reduce the requirement of completion of five DELRAP reviews to obtain unconditional DELRAP authority. Other DELRAP Issues Comment: There is no specific skill or indication of appropriate experience that could prove competency in condominium project approval. Skills such as understanding condominium financials and governing documents, understanding a reserve study, knowing what a major component is and whether a condo project is in sound financial condition do not translate to other fields. The most important skills would include HOA accounting principles, community management, and great attention to detail. The use of project consultants by DELRAP lenders would be beneficial in that the DELRAP reviewer would get a thorough review and the client would benefit from quick approval. Mistaken DELRAP approvals that are later withdrawn do not benefit anyone and add to the negative opinion of the process. HUD Response: HUD understands the skills required to review condominium project applications for FHA approval may be varied. Therefore, this rule provides the minimum requirements for FHA approved mortgagees to become DELRAP approved, but neither prohibits nor requires the use of project consultants. DELRAP Submission Process Comment: Relating to conditional DELRAP approval, HUD should clarify how a lender with conditional DELRAP authority should submit its recommended condominium project approvals, denials, and recertification's to FHA for its review. An email contact will be appreciated to speed up the procedure during conditional DELRAP. It would be most efficient, and provide consistency for lenders and for FHA, if a centralized submission source and process is established for these purposes for consistency. There should be clarification of whether the material must be submitted through FHA Connection, a homeownership center, or some other avenue. HUD Response: The specific submission requirements for conditional DELRAP authority will be detailed in Handbook guidance that will be issued following this final rule. DELRAP vs. HRAP Comment: Can there be flexibility where either HUD or a DELRAP lender approves condominiums? Can the lender choose? HUD Response: The final rule establishes the process for condominium project approval by either a DELRAP approved mortgagee or HUD. With limited exceptions (For example, use of reserve studies over 36 months old, which requires HRAP under § 203.43b(d)(6)(x) or other exceptions that may be contained in guidance) either method may be utilized. Mortgagee Letter (ML) 2016-15 Comment: HUD should not have issued ML 2016-15 in the middle of rulemaking on integrally related topics as mandated by federal legislation without further opportunity for interested parties to comment. HUD Response: HOTMA required HUD to issue guidance within 90 days of the date of enactment to establish the required owner occupancy percentage for FHA approved projects. The 90-day deadline made it inevitable that this guidance would be issued during the overall rulemaking process. HOTMA allowed HUD to act by Mortgagee Letter. Comment: While supporting a 35 percent owner-occupancy threshold as stated in ML 16-15, requiring a 20 percent reserve for capital expenditures and deferred maintenance will make this 50 percent owner-occupancy threshold unusable and mostly non-existent for the majority of the condominium projects. Also, the fact that HRAP is required for approval below 50 percent “confuses and undercuts” the emphasis on DELRAP authority as outlined in the rule. Also, the Mortagee Letter has a limitation on arrears on association fee payments and requires 3 years of acceptable financial documents. As part of its proposed rulemaking, HUD should allow comments on the Mortgagee Letter. Comment: Owner-occupancy of 25 percent is far from generally accepted practice and could jeopardize the equilibrium between owner occupants and non-owner occupants. However, there are markets that could benefit from a flexible standard as proposed, and commenter supports a fair regulatory process that would permit a condominium to receive approval with an owner-occupancy ratio of less than 50 percent. While HUD has, as directed by HOTMA, lowered the owner-occupant rate to 35 percent, few condominiums will satisfy the conditions to actually be approved for that rate. HUD should adopt procedures and standards that would result in condominiums actually receiving such an exemption. In particular, the requirement for a 20 percent reserve rate is excessive and unnecessary. Providing an incentive to over-fund reserves could be destabilizing, and may have significant unintended tax consequences, particularly for associations using IRS form 1120. Any association that has fully funded reserves pursuant to a current reserve study should be considered as having satisfied the reserve requirement. Comment: HUD followed the letter of HOTMA by allowing the owner occupancy requirements to be as low at 35 percent, but it did not meet the spirit of the law when it added the conditions that many have said are onerous and unlikely to be met by many condominium projects. Congress called for a lower limit to increase the number of condominiums that qualify for FHA approval, thereby increasing the number of units available to home buyers and renters. As mentioned above, condominium units are a particularly important homeownership option for first-time and low- to moderate-income home buyers, i.e., HUD's target consumers. However, the addition of tighter eligibility requirements when the owner occupancy rate is below 50 percent essentially eliminates the potential of a significant increase in Condominium Associations able to qualify for approval. HUD should remove the onerous conditions for the 35 percent owner occupancy rate established in ML 2016-15, including prohibiting the DELRAP option, requiring replacement reserves for capital expenditures and deferred maintenance of 20 percent of the condominium budget, and not more than 10 percent of total units more than 60 days past due. Per the intention of HOTMA, the owner occupancy rate for all HUD-approved condominiums should be 35 percent. The comment also requests confirmation that HUD will maintain its current owner-occupancy requirement of 30 percent for existing projects less than 12 months old. HUD Response: HOTMA mandated certain requirements that HUD must use to determine owner occupancy but did not mandate the actual owner occupancy percentage that HUD could issue through guidance, leaving HUD with discretion. HUD acted based on its experience and in accordance with its fiduciary duty to the Mutual Mortgage Insurance Fund. The final rule provides the framework to establish flexibility in applying this standard through policy guidance as market forces may dictate. HUD notes that HOTMA requires HUD to base such owner occupancy percentage on units occupied by the owners as a principal residence or a secondary residence or sold to owners who intend to meet such occupancy requirements, which would preclude a blanket inclusion of REO units, or any vacant unit not sold to an owner who intends to occupy the unit as a place of abode for at least a portion of the calendar year and does not rent the unit for a majority of the calendar year. HUD will consider these comments when issuing such policy guidance. Such guidance will address the specific owner occupancy ratios necessary as well as address if such ratios vary based upon the construction status of the condominium. Reserve Requirement Comment: A 10 percent reserve requirement is excessive, and HUD should consider lowering this amount. If an association has insurance in place for hazards with 100 percent replacement cost, then ostensibly the building would be covered for any major hazards or emergencies. Further, as outlined below, if the association gathers and holds 10 percent of its annual assessment income each year, requiring a reserve account to be funded with at least 10 percent of the monthly assessments could have the effect and probability of increasing sums held in the reserve account, and thus also increasing the amount of fidelity insurance required under the Guide. Comment: Most people buying condominium units are not looking into reserves before buying. The greater risks of collateral declining in value are pending legal action due to faulty construction; lack of a track record for a new project; and a high percentage of rentals. HUD Response: This rule establishes a reserve requirement of 10 percent of the monthly unit assessments, but provides for a lower reserve amount, based on a reserve study completed within 36 months, or such greater amount of time as determined by the Secretary under the HRAP review process. Required Recertification Timeframe A number of commenters supported extending the time for recertification. Comment: Condominium approvals should be extended from 2 to 3 years, making it easier to submit and get condominium approvals and allowing for more flexible guidelines. Many condominium associations prohibit rentals and without FHA financing opportunities, it makes them more difficult to sell, and thus creates plummeting values. This often creates a scenario where condominium owners stop making mortgage and association payments and creates hardships on the association to where the repairs and other amenities are compromised. Comment: Extending the provision to a 3-year period would reduce costs to associations in obtaining FHA approvals. Comment: A project may experience a number of financial or legal changes during the 3-year period. Special assessments are frequently imposed. If HUD extends the approval period, it is strongly recommended that HUD provide examples of what constitutes “fails to comply with any requirement for approval.” Comment: The change to 3 years will decrease submission burdens on lenders and review burdens on HUD. HUD should further memorialize the lenders' obligation to report known changes in circumstance through explicit language in the final rule. This language should mirror current guidelines that require lenders to report any known litigation, budget deficiencies, changes to association documents that may not align with eligibility requirements, and excessive homeowners' association delinquencies that place the property in financial distress as soon as they are made known to a lender throughout the 3-year approval period. A clear provision of lender reporting requirements and reporting processes will contribute to decreased risks for both lenders and HUD. Comment: This change will result in an increased number of projects approved and available for FHA lending with only a marginal increase in the potential for significant change since the project's approval. It will also potentially improve the customer experience as well as decrease costs to the condominium industry by reducing the need for re-approvals. Comment: Two commenters state that the time between renewal of FHA condominium approval should be 5 years, not the current 2 years or the proposed 3 years. One commenter states that HUD and the FHA need to take into consideration how the small volunteer HOA's will implement the final rule. While a large HOA managed by a professional company can easily meet the short renewal period because that is what they are paid to do, every requirement acts as a disincentive for the small HOAs. Renewing the approval every 3 years as proposed will have little or no positive impact. The unintended consequence of the current rule has been to limit housing inventory and hurt first-time homebuyers. One commenter states that the process is daunting, the average cost of obtaining the appropriate documents and legal opinions related to the certification process can range between $1,500 and $3,000. A 5-year approval period, rather than the proposed 3 years, would be ideal for reducing the burden to the condominium associations and entice many more buildings to apply for FHA approval, while still maintaining safety and soundness. HUD Response: HUD agrees with the comments supporting a 3-year timeframe, and this final rule retains the approach provided in § 203.43b(g)(3) of the proposed rule (§ 203.43b(h)(3) of this final rule) where projects may be approved for a period of 3 years from the date of placement on the list of approved condominiums. As noted by the commenters, the benefits of increasing the project approval period by 1 year far exceed the potential risks of changes to the project's requirements for approval while limiting the period beyond 3 years, which would run too great a risk of detrimental changes to the project. This final determination was based on FHA-insured condominium performance, consideration of risk to the Mutual Mortgage Insurance Fund, positive impact in the industry, and increase in affordable housing opportunities. As to the comments regarding failure to comply with requirements for approval and a lenders obligation to report any changes, this rule establishes the framework for approval requirements and establishes the recertification timefram [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-17213. Public record. Not legal advice.