Today we talk about some needed changes to FHA that could make condo purchases easier for FHA buyers. Also, we’ll talk about the “R” word and what effect that might have on housing.

Jon Lafferty:
Hey everybody. Welcome to Avoiding Real Estate Turbulence podcast. This is your pilot, Jon Lafferty with Century 21 Town and Country.

Tony Abate:
And Tony Abate with Ross Mortgage, and we are your real estate pilots. Our job is to be a real estate advocate and also to make sure you’re educated about the buying and selling process. We’ll keep you informed throughout until we get you safely closed.

Jon Lafferty:
In a real estate transaction, there are many reasons why you can encounter turbulence today. Today, we thought we’d talk about several different kinds.

Tony Abate:
Yep.

Jon Lafferty:
So, Tony, I think one of the things that that just happened recently was the changes to FHA that I think are going to be really beneficial for buyers and for condo associations. Talk a little bit about that.

Tony Abate:
Yeah, this is a big deal, and just to kind of step back, you know from this before we dive into it, so FHA financing has been around forever. It’s a wonderful tool, not only for first time home buyers but also for folks that are buying a primary residence and maybe they’ve got limited assets to put it in the transaction. Maybe their credit is a little bit compromised, and FHA has always been a perfect fit for this kind of thing. FHA, when you are financing a condo has kind of morphed over the last couple of decades and how that’s being handled. So FHA has always had an approved list of condo projects that they would allow FHA financing to be used on.

Tony Abate:
One of the things that happened is with their last batch of modifications to the policy, the approval came with an expiration, which makes sense, but historically they didn’t have an expiration on the darn things. They were just approved ad nauseum.

Jon Lafferty:
VA doesn’t have an expiration.

Tony Abate:
They don’t. You’re correct. You’re correct. So with this change to have condo projects become approved for FHA financing and then have an exploration, there was no mechanism to let the associations know, “Hey, by the way, your FHA approval is going to expire.” They just expired, and associations are busy, and they’re not necessarily going to say, “Well, you know what? I know no one’s asking about it now, but we better get our FHA approval re-upped.”

Jon Lafferty:
And we just had this conversation literally a month and a half ago.

Tony Abate:
Yeah.

Jon Lafferty:
Remember we were talking about that association, and we were talking about what they had to do to get reapproved.

Tony Abate:
Right, right, right. Yeah. It’s a great thing for an association to do, but it’s got some heavy lifting to it. There’s no doubt about it. And when you think about the flow of things when FHA changes procedure and said, “Okay, and here’s a new set of requirements. And by the way, there’s an exploration,” everybody’s expiration date was basically the same. And then of course over time, different condo projects would get approved at different times. But what happens is, is that you have a lot of condo projects that have FHA approvals that roll off that list in a short window of time. So if a home buyer says, “Well, hey, this is my zip codes. That’s where I’m looking at.” There’s maybe 12 condo projects that they could embrace, and ten of them are expired on the FHA list. They were FHA approved and then they weren’t.

Tony Abate:
So that’s a problem. It closes people out of appropriate home ownership that really fits their needs. So prior to the current setup, what FHA used to do is that they used to allow what was called the spot approval. And basically what that said is FHA responding and saying, Okay, this condo project is not FHA approved. However, if we can find out the short list of data bits on this condo project, we’ll give a one time approval for this one unit and allow the transaction to go.” And the bar was not really high. It wasn’t hard to get the questions answered. And we were able to close a lot of spot approved condos. Post recession, they eliminated that as an option. And so we’re back to what we were just talking about when a condo project expired from the FHA list, it’s just expired, and they were kind of going from square one to get reapproved on the FHA list.

Jon Lafferty:
Can I ask you why they stopped spot approvals during the recession? Was it being abused was? Were things being overlooked in the haste of spot approvals?

Tony Abate:
A little bit of all of the above. Spot approvals, I will say that one of the things that would happen with that is the spot approval was not analyzed by FHA. When the data came in, it was analyzed by lenders. Your response is appropriate. And so mistakes were made. Very possibly condo projects for closed on that should not have been closed on, et cetera. And the overarching thing to the whole thing is that condominiums were more highly impacted during the recession. Their values fell further, the default rates were higher, et cetera. And so FHA basically did what I think was an appropriate thing, and then they say, “You know what, we’re going to tap the brakes here. We’re going to stop this and get a better handle on things.”

Tony Abate:
Well, we’re not in that environment anymore. And so they have recently, goodness, it’s going to effect October, but the announcement was recent that they’re going to go back to permitting spot approvals. As you might expect, the batch of lenders that are here now are not the same batch of lenders to a large extent that that existed then. A lot of the bad actors are out of the game, and so there’s going to be a more appropriately a stringent process to do these spot approvals. But it’s still going to be a game changer for first time home buyers or anybody that’s looking to buy a condo using that financing.

Jon Lafferty:
Okay. Can you give us a snapshot of how that process is going to work?

Tony Abate:
Sure. It’s not a whole lot different than the way it’s working right now for conventional loans. So as you know, when we have a condo transaction that we’re taking care of, I, as a lender, would reach out to you, “Hey John, who’s the point of contact for that association or the associations management company?” And then with that information we’re going to send them a questionnaire. It’s a generic questionnaire that all lenders use. They’re going to fill out different data points, how many units are there, is the project completed, how many units are being used as rental? And then we want some budget information and some insurance information. Really what we’re looking for is the same thing any home buyer should be looking for. Is this association firing on all cylinders? So it’s real simple. We send out the questionnaire. The association completes it. They send it back to us. We evaluate it to make sure that it’s meeting FHAs requirements now with this change. And if they are, then we can close this transaction with an FHA spot approval for that one unit.

Jon Lafferty:
There are some things that were changed as well, were there not? As far as FHA requirements. Wasn’t one of the things that changed owner occupants versus a non-owner occupant, percentages within a development.

Tony Abate:
Right, right, right. Yeah, so you can now have a smaller percentage of owner occupied units than prior. They dropped that down by 10% so that now… Another way to put it as a condo project that has maybe a somewhat higher percentage of rental units would still be eligible financing than before. They also extended that approval process. Now we’re stepping back into the whole project approval instead of the spot approval. Now when a condo project gets approved, it’ll be approved for three years instead of two. So the expirations won’t be quite as impactful as they were before.

Jon Lafferty:
Two years comes and goes really quick.

Tony Abate:
It does. It does. Yeah, for sure.

Jon Lafferty:
So if you have one condo that was spot approved but the complex isn’t spot approved, along comes another buyer, and their realtor sees that, hey, well you had one FHA loan in there about six months ago. Hey lender, can we do a spot approval on this or do we have to get full FHA approval? What is the process for that? How many spot approvals can you have in one development?

Tony Abate:
Yeah. Yeah. Well there’s a concentration limit that says FHA won’t want too many units within a condo project to have FHA financing because then there’s too much risk associated with that condo project. So you can do additional spot approvals within that project. Once they hit a certain threshold, and I’m pretty sure it’s 10% of all the units with FHA financing, then FHA is going to say, “You know what? We’re getting a little too heavily loaded with exposure in that condo project.” But to answer your question a little more deeply, unit number two and unit number three and unit number four will have to go through the the spot approval again.

Tony Abate:
And there’s reason to believe that they would get that approval. The reason it has to be re-upped is the data might change. The insurance coverage might’ve lapsed. There might’ve been a lawsuit filed. There’s things that could make the data on questionnaire number two be different than the data on questionnaire number one. But if all things are equal, then there’s reason to believe that that next buyer should be able to get a unit spot approved in there as well.

Jon Lafferty:
Do you know if VA has a limitation as well on a number of units that can have a VA loan within a certain complex, if there’s a percentage that they don’t want to go over either?

Tony Abate:
Yeah. So I’m thinking back to what their checklist looks like, Jon, and I don’t think they do actually. Now what they don’t do is they don’t do spot approvals. So it’s a whole project approval. And we’re looking at VA, but I don’t believe that I’ve seen a concentration limit. Actually VA’s process is simpler to get a whole project approved than than FHA. We at Ross mortgage, we can expedite those in conjunction with VA. It’s a few weeks. It’s not the two, three, four month process that it takes to get an FHA project approved.

Jon Lafferty:
Yeah. Boy.

Tony Abate:
But the stigma is the problem.

Jon Lafferty:
That is the problem. Exactly. The time, the waiting. Which seller wants to be the canary in the cage for a full condominium development approval? And of course the association has to agree that they’re willing to go through that process of being vetted for approval.

Tony Abate:
Yeah, yeah. Yeah. And I guess my PSA of the day is, and I would encourage all associations to go through that process, rip that bandaid off once. Go through that process for FHA and VA approval. You’re simply going to be able to market those units to a greater subset of buyers. The more people you can, and, Jon, this is your category, but the more exposure you can have to more buyers, the higher the price that you can command. It’s just that simple.

Jon Lafferty:
Hundred percent. Yeah, 100%. Yeah. The bigger the pool, the better the chances.

Tony Abate:
Absolutely. Yeah. So, lenders are just now kind of ramping up the spot approval process that the mortgagee letter is just out. So we’re looking again October to be able to actually manage transactions with the spot approvals. But goodness, we’re just about done with August. So that’s coming up quickly.

Jon Lafferty:
Yeah, that’s right around the corner.

Tony Abate:
Yeah. Yeah.

Jon Lafferty:
Okay.

Tony Abate:
This is a big deal.

Jon Lafferty:
It’s huge. It changes the game for a lot. If you’re a buyer out there and you know you’re in a certain price range and you’d like to be able to consider condominiums, well, up until just recently and soon, there was a limited pool of FHA approved complexes out there. And so if you wanted to live in a certain area, let’s say you wanted to live in Shelby Township or Rochester Hills, well the number of FHA approved condominium developments is very minute compared to the number that are available. So if you’re looking in a price range and you only have two or three developments that you can actually consider living in because they’re FHA approved.

Tony Abate:
Right. Well, gosh-

Jon Lafferty:
That just… I mean, to only have that limited amount of choices, you end up going elsewhere because the two or three developments that are approved maybe are crap or maybe you don’t even necessarily like the development, but that’s all you have a choice of. But this is going to be a game changer because now you can look at every one of them. You just got to find an owner that’s okay with it. but otherwise it’s a great opportunity.

Tony Abate:
Absolutely. Absolutely. Yeah. It really disproportionately limits the buyer’s choice if they have to have a condo and they have to have FHA approval. So the spot approval is going to be a big deal. The other side of the coin that I would say on this, Jon, is that if a condo project does not have FHA approval, there shouldn’t be a conclusion that there is something lacking or substandard about that condo association. They may have simply just never applied or they may have applied and they had it and then expired. So I would not associate-

Jon Lafferty:
So we can’t assume that the people working for the homeowner’s association are a bunch of racists and they want FHA-

Tony Abate:
Absolutely, absolutely right.

Jon Lafferty:
There’s many reasons why.

Tony Abate:
Yeah. Yeah.

Jon Lafferty:
And I think you hit the nail on the head is it just never considered it. We’re afraid of the process because they were afraid it was too overwhelming and too demanding for paperwork and things that they had to submit, right?

Tony Abate:
Absolutely. And very possibly at the time that it was evaluated by to the association, maybe their units were selling at a reasonable clip and they didn’t feel the need to do that. But, Jon, I don’t have to tell you. The market’s dynamic. The heartbeat and the pulse of a market at one point in time in the calendar can be very, very different 12, 18, heck, six months down the line. And so a condo project that maybe would not have benefited before for FHA approval might strongly benefit now.

Jon Lafferty:
And also let’s throw in there that in the past if you had developments where you had a prices north of 450,000 – 500,000, well in the past it made no sense for a VA or FHA to apply for that. But the new VA change, that’s a game changer too in those, in those as well,

Tony Abate:
It is, Jon. So, what you’re referring to is association concluding we’re at a price point that is simply greater than what a person could obtain a VA or an FHA loan for. Well those numbers don’t remain etched in stone. Every year, at least for FHA, that value or that dollar figure changes. And if it changes to where now it’s in that window where we can now do a $300,000 FHA loan and these condos are selling for 250 – 300. All day long that association should have that FHA approval.

Jon Lafferty:
Absolutely.

Tony Abate:
Yeah.

Jon Lafferty:
Yeah. What else were we supposed to talk about?

Tony Abate:
We were going to talk a little bit about interest rates and some of the news now that’s out there relative to that.

Jon Lafferty:
Yeah.

Tony Abate:
The inverted yield curve and all that fancy stuff.

Jon Lafferty:
All right, so let’s talk about that. Let’s talk about the inverted yield curve, and if you could. Saw it on the news. It was explained on the news. But just in general, what does it mean and what does it predict and what can we inspect? Is the sky falling? Is the sky falling?

Tony Abate:
Yeah, it’s kind of what it feels like the way it’s decked up by the media sometimes. They use that fancy term “yield curve inversion.” If you kind of had a supermarket for savings bonds, if you will, and you say, “Well I can buy one that is a six month bond, a one year, a two year and a 10 year-bond,” well, predictably the bonds that have the longer maturity are going to pay a higher yield because your money is tied up for a greater point in time.

Tony Abate:
So, the one thing to note at this point in time in the economy is that rates across the board are just really, really low. They really are. And it’s a floor. Generally you’re not going to get below zero, although there’s some unique exceptions going on globally. But what’s happening now is that across the spectrum, all those yields are really, really low. And then the other thing that is often a conclusion and often accurately so is that as the yield curve inverts, and basically what that means is that those longer term yields, like say on it on a 10-year treasury security, are lower than what a person might have on a two year security. That’s called an inverted yield curve because it’s an unorthodox set of numbers that are out there.

Tony Abate:
And what the economists will say is that is an indicator of potential recession. We’ve had economic growth for a good solid handful of years now. And so this is in the news. It’s a sign that there’s potentially a recession. It’s not always accurate. It is generally accurate. And then, let’s define what that means. I mean we’re all still kind of stung from what happened last decade with a huge recession, almost depression. And the reality is is that they generally don’t look that way. A recession is defined by two subsequent or to successive quarters where the GDP is declined. So, we’re not looking at a situation where the sky is always falling.

Tony Abate:
And interestingly, Jon, from our perspective, a recession is not necessarily a bad thing for housing. In three of the last five recessions, housing prices actually went up. And then when you look at the other things that underpin this sort of situation, you do see a correlation between a weaker economy and lowering interest rates. And for our world and real estate, lower interest rates are a great thing.

Tony Abate:
So what happens? So what you have is that you have people that have increased buying power, you have a greater pool of people that are incented to buy because of the lower interest rates. And even sellers who are saying, “I don’t want to give up my low interest rate mortgage” are going to say, “Well, you know what? My new interest rate is not going to be so bad either.” So, there’s a lot of you might almost say contrary dynamics to a recession that are not such a bad thing for home buyers and home sellers.

Jon Lafferty:
That’s really interesting.

Tony Abate:
Yeah, yeah, yeah. So I guess the takeaway is that the spookiness of inverted real yield curve shouldn’t be viewed in a bubble with that’s the only thing that’s out there to be concerned with. And it’s also not a harbinger of doom that the sky’s going to fall as you said earlier. The good silver lining is that we’re going to have some cheap mortgage money for a reasonable period of time going forward.

Jon Lafferty:
So there’s a good chance that the Fed’s going to probably cut rates again, and we’ll probably continue cutting into next year.

Tony Abate:
Yeah.

Jon Lafferty:
Geez. How low could interest rates end up going?

Tony Abate:
Yeah, yeah. That’s a great question. They’ve certainly gone basically to zero before. In some countries they go below zero. That’s probably a whole nother show to talk about that. But you know, that fed move is one tool in the toolbox that the federal reserve has to basically either stimulate or slow down the growth of the economy. And that’s what they seek to do. And they, and they try to look in the crystal ball and they say, “Well gee, are things heating up to the point that inflation might be an issue? Oh, we better ratchet up the interest rates a little bit.”

Tony Abate:
Conversely, if we’re seeing signs of the recession inverted real yield curve, what have you, maybe we should lower interest rates and stimulate the economy. But what do we do now? So we’ve got potential signs of recession, but we also have an economy that’s doing really, really good. We have unemployment that’s really, really low. We have a stock market that’s that high. But The real issue that’s driving interest rates right now is, is as some some fear and uncertainty about the trade wars that are going on. So I would tell you that even the fed right now is divided as to whether they should be cutting interest rates or not. The most recent cut was not a unanimous vote. Yeah, and also too, the other thing that I would say is that the movement of the fed does not really always correlate to a movement in mortgage interest rates.

Tony Abate:
In fact, you could almost say that the fed is reacting after the fact or after the news. Let’s face it, most of the time when the fed moves, the news is out there that says the fed is going to move on and what they’re going to do. It’s not a surprise. Well the mortgage market doesn’t have to wait for that date. It’s going to respond. If the signs are out there that that potential recession is looming or economy is slowing or whatever, you’re going to see lower mortgage interest rates. And so, you could almost say that the fed move is kind of the cherry on the top to that. We’ve already experienced the change by the time the fed reserve does their thing

Jon Lafferty:
Right. So if applications are up and there’s a demand for loans and reifies, so there’s a demand for that cash that’s available to lend, doesn’t it just makes sense that the interest rate that was offered is going to go up because there’s more of a demand for that. So interest rates are going to naturally go up, and same deal interest rates are going to naturally float down if there’s less of a demand. So less loan applications, less people reifying, there’s more money out there, interest rates are going to naturally come down.

Tony Abate:
Yeah, that is absolutely Econ 101, and that is how it works. I guess the asterisk that I would put on that is that there’s other things out there in the ether that are driving these rates, right? I mean, there’s a lot of signs right now demand a lot of financing activity that would suggest that interest rates should be going up. But then you turn one more page in the newspaper and it says, “Well, hey, we’re in a trade war with China. Tariff here, tariff there, whatever.” And then that changes the tone, and that could tell the federal reserve to lower interest rates even though there’s contrary science to say that that’s the right way to be done or the right thing to do I should say. They have a tough job right now.

Jon Lafferty:
Yeah, they do. Yeah. It’s not easy. What the old saying? It’s not easy being green.

Tony Abate:
Not easy being green. Right, right, right. Yeah. Yeah. But yeah, the fed move is a little bit, in comparison to our world, is a little bit reactionary. By the time the fed does their thing, mortgage rates have kind of found their space. Where it does become impactful is for things like credit card, interest rates, tiered savings accounts, and retail financing such as auto loans. Those do tend to move almost in lockstep with what the federal reserve is doing.

Jon Lafferty:
Personally, what have you I noticed in the last 30, 45 days as far as reifies and loan applications. What’s Ross Mortgage seen over that time?

Tony Abate:
Yeah. We’re seeing definitely higher than expected volume right now, which is a good thing. And it’s on a few different fronts. One of the things that you and I have talked about before is that potential home buyers that are out there are comparing their present home and they’re looking at what’s out there now and they’re saying, “You know what? I don’t know what I want to do this because my money… It’s almost a lateral move. Why am I doing this kind of thing?” Well, as interest rates go down, that same monthly payment is going to possibly help those potential sellers who become home buyers step up a couple tiers. So, we’re seeing different conversations with folks that we’ve had pre-approved. They’re looking, gee, well maybe now I can step it up a little bit because I’m not really increasing my house payment, but I can buy a little more home.

Tony Abate:
We’re seeing folks that are doing equity out financing as well. They’re doing bill consolidation. They’re tapping that. What is now rather substantial equity in their homes on the tail of all the prosperity, and they’re using it to pay off debt.

Jon Lafferty:
Or student loans.

Tony Abate:
Or student loans. Yeah. A couple of those out there. Right, right. So there’s always a certain degree of nervousness I think. There’s that cliche saying, “Your home is not a piggy bank.” But I would say that consumers are making more conservative decisions with that type of financing and pre-recession.

Jon Lafferty:
Yeah. So I think you hit the nail on the head with regards to people who have just been sitting idle, and for one reason or another, didn’t want to make a lateral move, need to sell their home in order to buy, and it just wasn’t feasible in this previous market that we were in. Sellers didn’t have to consider contingent sales to purchase. And you even have the empty nesters who are looking to downsize. But I’m going to downsize from this 3000 square foot, four bedroom house into 1800 square foot house, and my payment’s going to be more than what it was on this house. Hell with that. I’ll just stay where I’m at. So I think you’ve brought that up and, and it’s great points on several of those fronts where if interest rates continue to hover and get a little lower even, I think that there are people who’ve just been kind of on the sidelines that it may actually spur to jump in and actively start looking to take advantage before things change.

Tony Abate:
For sure. The math is absolutely different than even just 12 months ago. And so those are folks that should be calling you and having that what if conversation.

Jon Lafferty:
Yeah, call me. What’s going on?

Tony Abate:
For crying out loud and say, “Hey, where’s my home value now? Where will my dollar go on the purchase? Et cetera.” So the conversation that happened 12 months ago is not etched in stone. You got to keep revisiting that and re-look at it. There might be opportunities that that buyers and sellers can be embracing that they’re not aware of.

Jon Lafferty:
Good stuff today. Yeah. I find this very interesting, and it’s always fun to talk about this kind of stuff, especially as, as it’s happening, as things are changing in the market. So, it’ll be really interesting to see how things sort of shake out in the coming months and into 2020 to see which direction things are going to head. Because right now we’ve got this group over here saying, “Well we’re already kind of dipping our toe in and looks like we’re heading this way.” And then you got this other group over here saying, “No, everything’s great. Everything looks rosy.” You and I have a history going back. So we both were working through the great recession and came out the other side, and so we both kind of saw it coming in and going out the other side.

Tony Abate:
Right.

Jon Lafferty:
And so I think we have some perspective that a lot of people who weren’t in the industry previously maybe don’t have.

Tony Abate:
Yeah, yeah, for sure. And gosh, if there’s any conclusion, it’s anything goes. Nothing’s off the table with these economic swings back and forth. And so, as consumers, goodness, you just got to keep eyes wide open, make smart decisions, which I think, again, post recession consumers have generally been doing just that. But yeah, there’s just no guarantees with what’s going on. They need to stay in touch with you and I and keep that finger on the pulse and make buying and selling decisions when there’s opportunity and maybe not do that if it makes more sense to stay put and just just again, keep eyes open with what’s going on.

Jon Lafferty:
Keyword there, opportunity.

Tony Abate:
Opportunity. There you go. Yes.

Jon Lafferty:
That’s perfect.

Tony Abate:
Yeah, for sure.

Jon Lafferty:
This was a lot of fun.

Tony Abate:
Yeah, yeah, yeah. Good stuff. And by the time the next show comes along, everything’s going to be different because the economic backdrop is changing.

Jon Lafferty:
That’s why we love this business, right? That’s why I love real estate, why you love the mortgage side because things are always changing.

Tony Abate:
Always, for sure.

Jon Lafferty:
And no two things are ever the same.

Tony Abate:
Yeah. Yeah. This was a good conversation, Jon. Yeah. Hey, thanks for listening to Avoiding Real Estate Turbulence. If you’d be so kind to subscribe, review, and rate, we would appreciate it. Please share with your friends, family, and coworkers that they too can find us on Apple podcast, Google podcast, and Spotify.