HUD 'guidance' irking industry

Posted: March 27, 2011

Philip J. Sutcliffe is a consultant who helps builders, lenders, lawyers, and homeowners associations work through the Federal Housing Administration and Fannie Mae approval processes for condo projects.

Navigating the choppy waters of government bureaucracy has never been particularly easy, but Sutcliffe is finding the going slower and tougher.

The problem is that the government agencies, under pressure to reduce or end taxpayer bailouts of the housing industry, are changing decades-old lending rules without letting anyone know in advance.

Sutcliffe's issue involved a HUD legal decision preventing buyers of condos in projects with leasing restrictions from getting FHA loans.

For developer Marshal Granor, of Granor Price Homes, the issue was a change in lending rules for condo projects in which any investor owns more than 10 percent of the total units.

Such changes are being made, Granor said, through a "guidance" procedure that, unlike rule-making, does not "require open hearings and discussions."

So many guidances are flowing from HUD, industry observers say, that just about everyone - from buyer to developer to mortgage broker to real estate agent - has a bone to pick.

HUD said both actions were taken to comply with requirements of the Housing and Economic Recovery Act of 2009 authorizing FHA to insure mortgages. The waiver of the conveyance guidance came when HUD realized most projects require a six-month minimum rental.

In large measure, all this is attributable to a perception that group ownership of anything, especially residential real estate, is a risk. But much of the problem relates to how housing is financed, and refinanced, these days, and FHA's role in it.

FHA emerged from the financial system's collapse as the country's major source of mortgages, insuring one in every three loans at last count.

Before the housing bubble burst in 2006, FHA accounted for just 3 percent of the total because the conventional-mortgage market had relaxed its standards. Ultimately, FHA eased its rules, too.

The housing agency, which has insured 34 million mortgages since it began in the Great Depression, could have continued on its way if Treasury officials had not begun to notice that borrowers with low credit scores and minimal down payments appeared to be defaulting at rapid rates, reducing FHA's reserves to unsafe levels.

The problem Sutcliffe, whose business is in Lansdale, had with FHA had been resolved, at least for a year, when the Community Associations Institute and the housing agency reached an agreement March 18 waiving a "guidance" that would make condo projects with any form of leasing restrictions ineligible for financing.

"Mind you, that most condominium documents are written with some form of leasing restriction, so that condo boards have some control over things like transient occupancy," Sutcliffe said.

What HUD was saying, he said, was that the rights of an individual unit owner were more important than the rights of a condo board or association "to promulgate rules that are in their best interest for the use and enjoyment of their community."

Developer Carl Dranoff called the guidance "a totally new wrinkle" that "subverts the very basis of a condominium and would be detrimental to sales and resales."

According to the Community Associations Institute, which met Jan. 7 with HUD on the leasing restrictions, the waiver means "many condominium associations whose approval was rejected due to rental restrictions may now qualify."

The waiver does not apply to Granor's complaint, affecting Country Bend in Newtown, Bucks County, which Granor Price Homes built 25 years ago. Of the 140 units built, the firm kept 40 (now 26), he said.

For 25 years, there was no problem with Fannie Mae or FHA financing because Granor Price met the rule that no investor could own more than 30 percent of the units.

HUD issued a guidance last year that a project can have - temporarily - up to 50 percent investor-owned units, but that no one owner can own more than 10 percent.

"So in a condo which is financially sound; has workforce housing, with homes selling at about $225,000, and meets FHA needs otherwise, no one can get a loan for their buyers," Granor said.

According to the condo association, six units had to be taken off the market and rented, he said. "So the leased-unit total is growing, people can't sell and move out, all because some bureaucrat passed a 'guidance' with no thought and industry input."

The National Association of Home Builders and the institute are working to clear the matter up, Granor said.

It is not only FHA and HUD changing things up, said Philadelphia mortgage broker Fred Glick. Under new Federal Reserve rules, beginning April 1 mortgage brokers, bankers, and bank loan officers will be limited to the gross compensation they can receive when the lender pays them (zero-point mortgages). They cannot discount the loan or help the borrower by paying some closing costs.

"If the borrower wants to get a lower rate, the brokers can charge whatever they like to the consumer," Glick said. Banks are not restricted by this, he said, and "will try to take over the mortgage business and eventually make mortgage costs higher."

The National Association of Independent Housing Professionals has sued the Fed in U.S. District Court in Washington for relief.

The Fed said this "final rule" implements the Homeownership and Equity Protection Act approved last year as part of Dodd-Frank consumer-protection efforts, as well as the Truth-in-Lending Act.

The lawsuit, however, maintains the rule will place mortgage brokers at a disadvantage in the marketplace and "will stifle competition . . . to the detriment of consumers."

Contact real estate writer Alan J. Heavens at 215-854-2472,, or Twitter: @alheavens.


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