While some may argue that America is an inherently suburban nation, full of citizens who prefer their own homes and yards, they forget that for decades the federal government has favored such sprawl. And no agency has been more complicit in this than the Federal Housing Administration.
In 1934, amid a lagging housing market, the FHA was formed to insure long-term mortgages that required little money down. Over this time, it has favored single-family housing over condos, and the bias 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 between single-family and multi-family housing a reaction to organic consumer preferences? Not hardly. Instead, the agency has for decades made obtaining mortgage insurance for single-family homes simple, requiring only a 3.5% down-payment, while making the certification process for condos much harder. As I wrote 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 qualified for FHA insurance. And if they didn’t, prospective owners often needed 20% down or more and excellent credit to get loans from banks, and had to pay higher interest rates. Naturally, this discouraged such buyers, which then reduced demand for existing condos and prevented 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 by phone that these stereotypes are outdated, as cities gentrify and condos attract wealthier demographics. A policy letter that Booth’s organization wrote in 2013 claimed that delinquency rates for condo projects were actually lower than the national average.
The Department of Housing and Urban Development, which oversees the FHA, has slowly begun to change its policies. In 2012, it raised, as a condition for FHA certification, the allowable commercial footprints for buildings to 35% (up from 25%). And it reduced the minimum owner-occupancy requirements from 90% to 50%. There were a few other minor changes in late 2015 that one real estate consultant called “a lot of sizzle and little steak.”
In the meantime, existing rules still make it tough to certify condo projects that are otherwise popular. Limiting a building’s commercial footprint to 35% effectively rules out many towncenter-style developments, which often feature floor-level retail, topped by a story or two of apartments. For this reason, the Congress of New Urbanism has long joined the National Association of Realtors in demanding relaxed standards. And the owner occupancy rule, while lower, still ignores the fact that many condo projects today are built and financed incrementally; most projects don’t just magically sell half of their units before breaking ground.
Nonetheless, these relaxed standards were not made permanent; they will go up for review this August. In the event that HUD and the FHA further ease the condo certification process, they won’t be doing any special favors for aspiring high-density urban builders and dwellers. They will simply be narrowing the advantage long granted to single-family homes.