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Four Ways the FHA Promotes Sprawl

EDITOR'S DESIGN CHOICE

Sprawl, by Mike Strozier. via Flickr.

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“It is far easier for an individual homebuyer to get insured by the Federal Housing Administration than for an entire condo association to.” So writes Scott Beyer in Forbes, noting that the federal agency in charge of insuring mortgages favors single-family homes over condominiums. Here’s how.

Imbalanced portfolio. Multi-family units represent only about 13,000 of FHA-insured projects, compared with 4.8 million single-family homes. In 2015, multi-family units accounted for only 2.8 percent of FHA’s overall portfolio.

Outsize downpayment. Not only is the certification process for mortgage insurance harder for condo buyers versus single-family homebuyers, but the downpayment is much bigger, says Beyer: as much as 20 percent down, compared with 3.5 percent for buyers of single-family homes.

Special requirements for owner occupancy and limits on business space. FHA’s rules, created with a single-use residential neighborhood in mind, throw up barriers to the kinds of projects that often build occupancy over time and include first-floor retail. Numerous other requirements have led to a dismal statistic: only 10 percent of condos qualify for FHA-insured loans.

New, better rules that still don’t meet the mark. Some changes to FHA’s rules have been made in recent years, says Beyer: “The most recent measure, in October of 2016, was the Housing Opportunity through Modernization Act (H.R. 3700), which was passed overwhelmingly by Congress, and signed by President Obama. It raised, as a condition for FHA certification, the allowable commercial footprints for buildings to 50 percent. It reduced the minimum owner-occupancy requirements from 90% to 50% (and 35% in some situations). And it aims to streamline the certification process that is required every 2 years, which costs associations several thousand dollars on average each time….Still, the new rules perpetuate the bias against condos.”

One of the problems is parking, which counts as commercial space to the FHA. Parking minimums in most jurisdictions means a developer’s hands are tied, and the problem is passed on to the condo association. Thus, most mixed-use projects will be automatically disqualified from FHA backing.

The 50 percent owner occupancy rule is an improvement, says Beyer, but still burdensome: “It ignores the fact that many condo projects today are built and financed incrementally; most don’t just magically sell half of their units before breaking ground. And because they don’t, most still won’t get FHA backing.”

For the full article, see “The Federal Housing Administration (Still) Insures Suburban Sprawl over Urban Density,” by Scott Beyer.