As of February 1, reverse mortgages will be significantly more difficult to obtain for residents of cooperatives (i.e. condominiums).
That’s because HUD recently changed the rules governing the process for this class of borrowers, by making the approval process more rigorous. Specifically, condo dwellers applying for reverse mortgages will have to wait a minimum of 8 weeks so that HUD can confirm that the dwelling meets their lending standards. In a recent article on the rule changes, one expert confided that the true wait time is likely to be closer to 18 weeks. In addition, all projects that have already been approved will need to be re-approved by HUD.
Of course, there is always a back door, and in this case, that means seeking what’s known as “spot approval” directly from the lender. Under this system, lenders can certify that individual units meet HUD lending standards, but take responsibility if it is later determined that their assessment was invalid. In order to crack down on lenders that were abusing their power, however, the FHA will replace this with a new version, under which any lender that confers spot approval on a project must also bear responsibility for all future loans against units in that same mortgage. Given the level of potential liability that carries, it’s no wonder that so few lenders are still willing to proceed with such spot approval.
On the one hand, this system is necessary, since condos were among the biggest price losers in the housing bust. From the standpoint of HUD, then, insuring reverse mortgages on these properties against default (i.e. that the home price falls below the value of the mortgage) is incredibly risky. The only way to mitigate against this possibility (and stave off having to ask Congress for a bailout, incidentally) is to approve condo loans on a case-by-case basis. For those seniors that live in private communities that are legal incorporated as cooperatives but whose homes are separated from each other, they can apply for “site condo” designation, which is apparently easy to obtain but complicated to undo.
Given the FHA’s financial troubles, this development was somewhat foreseeable, and probably necessary. And while it represents a small obstacle, it’s certainly not a roadblock for those that live in condominiums and want to obtain reverse mortgages. You’ll just have to be patient.