By Rusty Bradshaw
Some homebuyers in the Sun Cities are no longer facing an obstacle to obtaining a loan created by a conflict between FHA and rec centers’ policies regarding preservation fees.
A U.S. Housing and Urban Development ban on FHA loans was lifted, opening the door for such loans to go forward if all other requirements are met. While the ban was lifted some time in April, according to Stephanie Smelnick, FHA/HUD Arizona field office director, few people knew of the action until last week. Greg Eisert, Sun City Home Owners Association board member and Governmental Affairs Committee chairman, told the SCHOA board during its June 27 meeting, he had recently talked to Ms. Smelnick who told him of the HUD action to lift the ban. Residents have also asked Recreation Centers of Sun City board members in their subsequent meetings since January about the status of the situation, only to be told RCSC was in communication with HUD officials to resolve the problem.
However, the ban lifted was strictly for condo sales, Ms. Smelnick added.
“Our policy was reviewed by headquarters,” Ms. Smelnick said. “If you have a condo with a rec fee, as long as that fee benefits residents in that area, loans will be approved.”
Ms. Smelnick, though, would not say there is a ban on single family home loans where rec fees were involved.
“That issue is still in discussion,” she said. “It is a case-by-case basis.”
FHA loan applications for purchases and reverse mortgages are being denied due to preservation fees on property transfers, including all transactions. Policies in Sun City and Sun City West trigger their preservation fees — Preservation and Improvement Fee in Sun City and Asset Preservation Fee in Sun City West — on all property transfers, including if a lender forecloses on a property or an owner does a deed-in-lieu-of-foreclosure.
Real estate officials were told until these policies are revised, FHA officials will not approve loans — purchase, refinance or reverse mortgages — for Sun Cities homes, according to Vicki Frye of Frye Realty.
“This could possibly cause financial injury to the residents of the two communities,” she stated in an email earlier this year.
Lynette Jordan, with Primary Residential Mortgage, said she knew of the FHA situation and because of that did not take any reverse mortgage applications. She turned away 25 applicants in the past six months.
“I don’t take applications because I don’t want to raise people’s expectations and then tell them there is nothing we can do for them,” she said.
Liz Recchia, West Maricopa Association of Realtors governmental affairs director, said she spoke to Chris Herring, RCSC assistant general manager, who shared information he received in a correspondence with HUID officials.
“(He) notified me FHA has drafted a mortgagee letter regarding this,” she said. “I am awaiting confirmation from my Washington, D.C. contact. We are looking forward to seeing a mortgagee letter and hope it is released soon.”
Mr. Herring said, according to Ms. Recchia, RCSC officials had not received communication from HUD that the RCSC Preservation and Improvement Fee complies with FHA rule 24 CFR 203.41 with FHA insured loans being available in Sun City without restriction. He said they had received a verbal acknowledgment that FHA rule 12 CFR 1228 was applicable to condominiums and as a result FHA insured loans would be available to that property type.
Last year, Congress passed the Housing Opportunity Through Modernization Act, according to Eduardo Cabrera, FHA Region 9 public affairs officer. The law required FHA to align its approval process for condominium developments with those used by Fannie Mae and Freddie Mac.
“To meet this requirement, FHA will now approve condominium developments that require owners to pay a ‘private transfer fee’ if these fees are deemed to improve/protect the condition of the property,” Mr. Cabrera stated in an email. “So, in certain circumstances, FHA is approving condo developments that include these fees.”
However, FHA-approved lenders are not approving individual loan applications that include elements that might limit the property’s future sale, Mr. Cabrera added.
“These private transfer fees have historically been considered a ‘restriction on conveyance’ and unless a condo development/condo board releases the owner from this fee, lenders tend to deny the loan application,” Mr. Cabrera stated. “This regulation is 24 CFR 203.41.”
Joelyn Higgins, RCSC communications and marketing coordinator, stated in an email RCSC received communication from HUD officials that a mortgagee letter addressing FHA insured loans for single family homes was drafted. This mortgagee letter was not yet sent to HUD branch offices for comment and is awaiting final draft and approval, she added.
“Without providing specifics, HUD indicated that the content of the draft mortgagee letter was positive for RCSC and similar organizations in that the language would allow FHA insured mortgages where there is a capital improvement fee, such as the RCSC PIF,” she stated. “RCSC is optimistic that the final mortgagee letter will indeed positively address the issue and pave the way for FHA insured loans in Sun City.”
No timeframe was provided for when the final mortgagee letter would be provided by HUD, Ms. Higgins added.
Ms. Smelnick said the loan ban came about because of policies regarding fees in other areas.
“There were some states that had developers charging those fees and the proceeds did not go back to the community,” she said.
FHA officials hope to issue clarifying guidance on this issue this year, Mr. Cabrera said.
That means some FHA loans could continue to be denied. Ms. Frye said her office had a loan denied two weeks ago.
“Some lenders are processing loans through FHA but at the last minute say they won’t go through and try to get the buyers to do conventional or other loans,” Ms. Frye said.
Recreation center officials in the Sun Cities had no plans to revise their preservation fee policies, as were requested by real estate professionals in the Northwest Valley.
“Per the CC&Rs, all dues/fees paid by members must be uniform,” Cathy Peterson, RCSCW management assistant, stated in an email earlier this year. “To apply APF fees to some and not others does not follow CC&Rs or past practice.”
RCSC officials believed it was premature to make any changes until the issue was clearly defined as HUD officials were researching a change in their policies to allow loans despite preservation fee policies, according to Ms. Higgins when the issue was pressed earlier this year.
Rec center officials in both communities have maintained that stance.
Changing FHA policies will take time, and that could damage the housing market in the meantime, according to Ms. Recchia.
“The free assumability clause is in the FHA underwriting guidelines,” she explained. “The FHA will need to address this issue not just for retirement and housing communities, but the free assumability clause affects other types of transactions, for instance leased rooftop solar.”
She stated any change in underwriting guidelines is subject to approval by the HUD secretary and will need to meet concerns of both Congress and the president, she added.
“Since FHA insures loans, the underwriting guidelines are designed to protect the taxpayer,” Ms. Recchia stated in an email. “Any significant change will come under scrutiny from multiple private and public entities.”
FHA’s underwriting guidelines have been in place for a long time, according to Ms. Recchia. Historically, FHA purchase loans, refinances and reverse mortgages were not prevalent in retirement communities as most retirees and investors would pay cash, have significant down payments with conventional loans or use other conventional products, she explained.
“As the number of baby boomers retiring has increased, so has the number of FHA loans, refi’s and reverse mortgages,” she stated. “FHA programs can be less restrictive than conventional programs, particularly when it comes to credit scores and cash down payment requirements. Many baby boomers are burdened with debt and must use FHA programs to purchase.”