Cohousing-L Mailing List: Re: FHA approval: yes or no?

[Raines Cohen (rc3-coho-L]

On Sat, Sep 27, 2014 at 5:03 PM, Deborah Carey <boiester [at] gmail.com> wrote:
>Can you briefly tell me what the advantages and the disadvantages have
been for your cohousing if you decided to get FHA approval?  If you decided
not to get it, can you tell me if your reasoning was sound, or if you feel
now that you should have done so?

Deborah -

Thanks for checking in with the extended community of cohousing communities
for guidance on seeking HUD/FHA approval.

I think you'll find lots of different answers depending on when a community
was completed; lending policy has shifted a lot nationally since the 2008
banking crisis, and options that were or were not available or worthwhile a
quarter century ago have evolved beyond recognition. And the reasons for
seeking and maintaining it have changed, as have community demographics.
Plus cohousing is a lot more well known, with a track record to be proud
of, instead of an innovation facing challenges fitting into existing
categories and financial product offerings, so please join me in taking a
fresh look.

In the golden days before 2008, FHA approval was a relatively easy process,
often delegated to to lenders in the field and not rigorously reviewed;
some communities found that their right-of-first-refusal clauses and other
resale restrictions in their documents prevented approval; with a large
competitive lending market, it was often deemed not worth pursuing.

In the last half decade, as banks got out of risky businesses like actually
issuing and holding loans to homeowners (the whole field has become a game
of "hot potato"), the federal government became a primary backer of most
residential mortgage loans, rather than "lender of last resort." As a
result, the process was tightened and HUD took steps to reduce risks - to
make its government-backed loan pool more secure.

Until this year, many cohousing seeking FHA approval found that the
tightened review process, including web searches, resulted in their being
identified as cohousing condominiums (whether or not the word was in their
legal name). HUD is in the process of rebuilding the regulatory framework
for the program since Congress moved it to a different section of law, and
cohousing was apparently in the pile of "stuff we don't understand and will
figure out later, so the answer is 'no' until we do".

We ran into this issue here at Berkeley (CA) Cohousing when seeking FHA
approval for our community, so that my neighbor Alice could get a reverse
mortgage and stay in her home, while living on a small fixed retirement
income.

The most common and lowest-priced reverse mortgages, which let seniors
access their home equity and receive payments so long as they continue to
live there, are known as "Home Equity Conversion Mortgages," or HECM loans.
Lenders can make these loans with confidence, knowing that for FHA-approved
condominium neighborhoods, the Federal backing means that they won't be on
the hook for more than the home value. FHA mortgage insurance, tacked on to
the price of loans, provides the pool of funds that makes this possible.
But to "fit the box," your condo has to meet a number of requirements,
allowing HUD and its lenders to treat it as a commodity that they can be
confident of selling at market rates, without encumbrance.

Because HUD had marked our community as cohousing, Alice's application for
community approval was refused. HUD wouldn't proceed to legal review of our
inclusionary zoning agreements with the city (see below), so we couldn't
get the guidance needed to get the city to fix them. I ended up meeting the
Housing Commissioner (who it turns out knows people living in cohousing),
organizing a petition drive (with support from many partners including
PEERS, change.org, Coho/US, and Partners for Affordable Cohousing, with an
Aging in Community website presence), getting over 10,000 signatures in one
weekend, and national policy has shifted, and our application has moved
forward, after we met with HUD staff in DC.

We still have to work out some errors in the city's drafting of our
documents before we re-apply, so we're in that process now.

Other members of our community are getting older and now interested in
exploring the options this could open up for us, but some are concerned
about what happens after a member passes, and their home is foreclosed
upon, or sold by the estate.

Some of us are exploring whether and how we could create an alternative
pool of funds that could privately finance reverse mortgages in cohousing,
so that the interest/return could stay in community rather than flowing to
outside lenders.

Of course, FHA approval can also ease the way to members who qualify
getting low-downpayment loans, potentially increasing your community's
economic diversity.

So there may be benefit to getting FHA approval, the same as there would be
in getting LEED Certification, but it's also worth looking at community
approaches that can deliver equivalent or alternative benefits using
different approaches.

You also wrote:
> Could you also tell me if the community in which you built had
requirements for low income units?

This is a separate issue, one of what's called "inclusionary zoning," with
policy set on a town/county basis, sometimes under pressure/guidance from
states, but it does have effects on FHA approval.

My home community was created between 1994 and 1997, incorporating several
existing homes and adding several new ones.

Because we were taking existing rental homes off the city's rent-controlled
market, our project would have been subject to condominium conversion fees,
designed to preserve affordable rental housing.

At $37,000 per unit, these fees would have raised our prices out of reach
of many of our members, who would qualify as "moderate income" residents
eligible for some forms of assistance.

Instead, our community's founders helped draft changes to the city's
inclusionary housing law that exempted communities that remained
"permanently affordable" - in our case, with home prices starting at our
market prices but for 30 years capped to only increase as area incomes did,
and with the city reviewing the income of each new buyer to verify that
they made no more than 150% of area median income.

So to answer your question, yes, 100% of our homes are "limited-equity
condominiums" priced at below-market rates with income qualifications. This
may be part of why it's been 11 years since our last resale.

Raines Cohen, your Cohousing Coach and Community Organizer
 Cohousing California / East Bay Cohousing
 back in DC this week for an EcoDistricts summit and citizen lobbying on
the Hill on "Aging in Community" with "Beacon Hill" Village Networks

PS When Ann asked where your community is, I believe she was just trying to
encourage your participation in list etiquette, which asks people to
identify their community and its location so we can give advice that is
relevant for your context. For instance, your approach might be different
in a high-demand, high-priced "hot" housing market vs. one where minimizing
cost is most important, where many members would be struggling to afford
buy-in for your community, and might be more interested in different
programs including lower-cost loans; plus, state laws and financing
programs vary, and some might give you advantages based on FHA approval.
Plus, the best marketing/recruiting advice I've heard is: never pass up any
opportunity to promote your commute and attract new members, whether for
initial purchase or resale.