The FHA (Still) Insures Sprawl Over Density
The bureaucracy favors single-family homes over condos, and for no good reason.
While some may argue that America is an inherently suburban nation, full of citizens who prefer their own homes and yards, they forget that the federal government has long favored such sprawl. No agency has been more complicit in this than the Federal Housing Administration. The massive bureaucracy has for decades encouraged single-family detached homes over high-density, multi-family condos. And while there have been efforts in recent years by Congress and the Department of Housing and Urban Development to even the playing field, reform continues to move slowly.
The FHA was formed in 1934, amid a lagging Depression-era housing market, to insure long-term mortgages that required little money down. It began by engineering a single-family housing agenda that prevails today. According to its website, the agency has “insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio.” The Washington Post adds that “through August of , condos represented barely 2.8 percent of total FHA loan volume.”
Is the FHA’s wide discrepancy a reaction to organic consumer preferences? Hardly. Instead, the agency has simply made obtaining mortgage insurance for single-family homes easier, requiring only a 3.5% down-payment. Meanwhile, the certification process for condos is much harder, and if projects don’t qualify, then prospective buyers must provide around a 20% down-payment, have excellent credit and pay higher interest rates. As I wrote in 2014 for Next City:
As late as 2012, a condo project received certification only if 90 percent of its units were owner-occupied (as opposed to investor-owned or renter-occupied), while only 25 percent of the building space could be used for business purposes. The agency also forbade the insuring of units unless they were inside condo buildings where every other unit qualified for insurance. Lastly, a provision existed forcing owners to attain “certification” for insurance — something not required of single-family homes. This certification must be renewed every two years, in an expensive process that typically takes six months.
As a result, only 10% of condo projects nationwide qualify for FHA insurance. Another analysis by the Community Associations Institute found that an even smaller percentage of the nation’s 152,000 condo associations qualify. Lacking these government protections enjoyed by single-family home buyers has naturally discouraged condo buyers, which then reduces demand for existing condos and prevents new construction.
According to Megan Booth, a policy representative for the National Association of Realtors, the longtime rationale for these tighter guidelines was that condo buyers were generally lower-income, and having the FHA insure them carried more risk. But she explained that these stereotypes are outdated, as cities gentrify and condos attract wealthier demographics. A policy letter that the NAR wrote in 2013 claimed that delinquency rates for condo projects were actually lower than the national average.
There have, however, been multiple attempts these last few years to change the status quo. 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%. 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. Take, for example, the requirement that a building’s commercial footprint can’t exceed 50%. This is especially egregious because parking space — which, thanks to minimum parking requirements, takes up a huge portion of many projects — fits within the definition of “commercial space.” That means that most any project with stores at floor level and a couple stories of underground parking will be disqualified from FHA backing — not to mention the much smaller Main-Street-style developments that feature an apartment or two above a storefront. For this reason, the Congress of New Urbanism, an advocacy group that calls for neo-traditional development styles, has long joined the National Association of Realtors in demanding relaxed standards.
The 50% owner occupancy rule, while much lower than it was several years ago, is also still very 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.
In this respect, the recent changes made to the FHA’s condo policy, which still need to be worked out within the new HUD administration, are really just more of the same. It is far easier for an individual homebuyer to get insured by the FHA than for an entire condo association to. And at a time when cities are growing and the condo market is less risky than before, there’s no good explanation for this. It just shows the federal bureaucracy’s resistance to change.
[This article was originally published by Forbes.]
Scott Beyer owns and manages The Market Urbanism Report. He is a roving cross-country journalist who writes regular columns for Forbes, Governing Magazine and HousingOnline.com.