The Federal Housing Administration Clarifies Its Position on Co-ops

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Editor’s Note: Newly appointed Assistant Secretary for Housing Federal Housing Administration Commissioner, John Weicher, recently entertained questions from NAHC about FHA’s stance on co-ops.

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Question:            Mr. Commissioner, the Administration has made increased homeownership a major goal for the Department of Housing and Urban Development. Co-ops are the oldest form of multifamily homeownership in the U.S., and, due to lower closing costs and less restrictive credit analysis of purchasers, offer a way to overcome traditional barriers to homeownership for low-and moderate-income families. How will the Administration take advantage of the opportunity to promote cooperative ownership as a path to homeownership?

Answer:            The department is committed to increasing the level of homeownership, and we see housing co-ops as one tool to help achieve that goal.

Question:            Along that line, co-ops have proven to be one of the most economical means of homeownership. How soon will the department extend accelerated mortgage processing to Section 213, the stellar, dividend-returning cooperative program?

Answer:            We expect that processing of housing cooperative applications will be added to the Multifamily Accelerated Processing (MAP) Guide in FY2002.

Question:            Last year Congress passed, and the President signed legislation making cooperative units eligible for FHA-insured reverse mortgages. NAHC and the reverse mortgage industry are eager to see this program rolled out. Where does the department stand in implementing this program?

Answer:            The department is in the initial stages of developing regulations to implement Section 201 of the American Homeownership and Economic Opportunity Act of 2000.

Question:            Mortgage pay-off is fast approaching the 236s and 221(d)(3)s, as well as 213s outside of New York. Co-op boards have many questions about their options and would like help from HUD. Many will want rehab loans. Can the department designate, say, six offices that will have a trained professional who can advise co-ops at this critical life juncture?

Answer:            One regional office recently received housing cooperative training by NAHC, and we are looking at providing this type of training to other offices that deal with co-ops.

Question:            We were gratified to see the Administration call for and Congress pass a 25 percent increase in the multifamily mortgage limits.  As you know, limits haven’t been increased since 1992. With the higher limits, we can expect increased interest in the 213 program, which by the way, requires no credit subsidy and performs so well that it returns part of the premium each year to the borrowers. How can we assist in ensuring that there are underwriters in each HUD office who are trained in cooperative housing?

Answer:            Once we add the housing cooperative provisions to the MAP Guide, we will be discussing with our staff how to deal with an increased level of cooperative applications in offices that have had little or no cooperative experience.

Question:            There is also a small credit subsidy for fiscal year 2002, but it appears the Administration is counting on an increase in multifamily insurance premiums to close the gap in the future. One of the premium increases involves the 221(d)(3) program. Co-ops use (d)(3)s for an affordable homeownership program. An Urban Institute study in 1994 and a study in Mortgage Banker in 1985 showed that the 20-year record for 221(d)(3) co-ops was as much as twice as good as (d)(3) rentals. That translates into less credit subsidy. They also have lower operating costs than rental and therefore serve lower-income families or require less Section 8 subsidy. If the increased premiums result in fewer loans being used and therefore fewer lower-income families being served, the increase would seem to be counterproductive to HUD’s mission. Can you assure us that the positive “co-op difference” will be considered when setting insurance premiums?

Answer:            The Section 221(d)(3) credit subsidy rate for FY2002 was developed considering the performance of loans that were originated as market-rate co-ops and rentals. We would be willing to review any data provided to us and compare it with ours, but are not aware that 221(d)(3) co-ops would have a significantly different credit subsidy rate and mortgage insurance premium than 221(d)(3) rentals. Because Section 213 has been such a successful program, housing co-ops might take advantage of that program to avoid the need for credit subsidy and the higher premium.

Question:            A major irritant for cooperative owners is HUD’s Real Estate Assessment Center, or REAC for short. The objective of REAC is an admirable one, and cooperative members support the general idea of inspections. Information that flows from inspections can be beneficial to cooperative boards. The actual conduct of the inspection, however, often times leaves quite a bit to be desired. The problem is that the REAC inspection treats all multi-family properties the same. They don’t recognize the difference between cooperative and rental. In a co-op, for example, the interior portion of a unit-from painting to appliances-is generally the responsibility of the cooperative member (just as in a condominium) and therefore the co-op should not be held responsible for things like appliance problems or chipped paint. Unfortunately, REAC inspections don’t recognize this difference.

Another problem is accessibility. Inspectors have a sample of units they should visit. If they can’t get in one, they must list it as a non-entry and choose an alternative unit. In rental units, this can be managed because landlords may require their tenants to give the manager keys to their apartments or, in some cases, there is a master key. Not so in co-ops, where master keys are the exception, not the rule. With cooperative membership, a shareholder may feel this is an invasion of privacy. Almost half of all co-ops are low-rise and townhouses. Shareholders want to be treated like other single family homeowners, not like other renters.

What can be done to keep the inspection process meaningful, but at the same time, recognize that co-ops are usually more like condos and fee simple townhouses, and less like rental housing?

In pursuit of more meaningful inspections, NAHC members have been working with HUD headquarters officials to develop a checklist that could guide field offices where co-ops are involved, so that field offices are apprised in advance as to which maintenance responsibilities fall to the co-op and which to the shareholder. In this way the field office can ignore REAC findings that are not within the control of the cooperative board. We have been waiting for a favorable decision on the checklist and form for several months. Can you provide a decision date?

Answer:            We have recently begun discussions with the Real Estate Assessment Center on the proposed checklist and will provide a response as soon as possible.

Question:            I think you would agree co-ops have some characteristics of your multi-family programs and at other times are more single family in nature. As a result, you sometimes have an office, say multi-family, drafting regulations or operative procedures that actually impact the single family side of co-ops. How do you facilitate communications between your separate offices? Isn’t the most logical solution to fill the mandated position of special assistant for cooperative housing? This position was authorized in the Housing Amendments of 1955, but has been vacant for a number of years. Do you intend to designate someone to fill this congressionally mandated position?