Lack of consultants stymies FHA purchase-rehab loan program
April 25, 2023 5:00 AM
The scaling back of procedural hurdles could revitalize the Federal Housing Administration's 203(k) program, according to trade groups like the National Association of Realtors and Community Home Lenders of America.
Improving access to and the number of authorized consultants who have experience with contract work and are a requirement for the FHA's traditional rehabilitation and purchase loans would go far to improve things.
"We recommend FHA expand its current pool to allow a wider range of professionals to qualify as consultants, especially in areas where they are not readily available," a letter from NAR and the community lenders said.
The trade groups' letter could be influential becausethe Realtors association is a top lobbyist organization and community lenders play a key role in helping the FHA fulfill its affordable housing mission.
The Mortgage Bankers Association also suggested in a separate letter that the administration "allow the use of outside consultants to oversee home renovations in instances when FHA-approved consultants are not readily available."
The FHA, which is an arm of the Department of Housing and Urban Development,acknowledged last July that the 203(k) program was overdue for modernization and issued a request for input on ways to improve access to the loans in February. It received several letters in response.
Improving access to and the number of authorized consultants who have experience with contract work and are a requirement for the FHA's traditional rehabilitation and purchase loans would go far to improve things.
"We recommend FHA expand its current pool to allow a wider range of professionals to qualify as consultants, especially in areas where they are not readily available," a letter from NAR and the community lenders said.
The trade groups' letter could be influential because
The Mortgage Bankers Association also suggested in a separate letter that the administration "allow the use of outside consultants to oversee home renovations in instances when FHA-approved consultants are not readily available."
The FHA, which is an arm of the Department of Housing and Urban Development,
Dwindling originations
The dollar volume of loans originated through the 203(k) program has been trending downward over the last two decades, according to a Polygon Research analysis of FHA data. At one point, volume approached $4 billion, but by the end of 2022, it fell to $1.31 billion.
The departure of a large player in the space, in addition to procedural hurdles, contributed to diminished volume over time, said Polygon Research CEO Lyubomira "Val" Buresch.
"This trend was propelled by the exit of Wells Fargo in 2018 from this type of originations (they were originating over $1.1 billion per year in 2010, 2011, and 2012)," she said in an email. "Of course, there are other factors such as market conditions, operational complexity of this type of loan (lender approvals, loan officer training, compliance, etc.), and other similar products."
Some see the shortage of consultants as being at the center of the conversation around the multiple, interconnected barriers to 203(k) use and note that it ties back to events that occurred over a decade ago.
"In 2005, when FHA created the Limited 203(k), they cut out the consultant from that portion of the program. So a lot of these folks said, 'you know, I'm going to go find something else to do for a living,'" said Jim Bopp, vice president of national renovation lending at Planet Home, in an interview.
Limited 203(k) loans only can be used for nonstructural repairs up to $35,000 limit and they don't require a consultant, for whom borrowers pay financed fees of around $400-$1,000, charged on a sliding scale.
The $35,000 limit doesn't account for how high current expenses for materials have gotten, particularly with inflation, according to NAR and the community lenders association.
"As the cost of labor and supplies increase over time, our organizations recommend FHA increase the amount available to buyers and owners from $35,000 (or $50,000 if located within a Qualified Opportunity Zone) to match the market standard needed to facilitate renovations," the groups said in their letter to the FHA.
"(Many lenders) want to go to $50,000 (on the Limited 203(k) program as is already allowable with the Opportunity Zone feature of the program)," Bopp said, referencing the broader set of industry comments the FHA has received.
The perception of the Limited 203(k) as a more streamlined process has led many lenders to choose this option since its creation in 2005.
This in turn has led to lenders seeking to increase the dollar amount of repairs being allowed without the requirement to have a 203(k) consultant involved in the loan process.
But consultants provide necessary checks and balances, Bopp said.
At a high level, the consultant's role is to protect the borrower, lender, and FHA insurance fund by putting an expert in a position to oversee the construction budget and contracting work done.
Some commentators have suggested it could be helpful to the Limited 203(k) loan to add an option to finance the consultant fees into the loan as they can do on the standard 203(k), which isn't currently possible. This could help develop more talent in this area that could serve the broader market.
The FHA should "provide an option for lenders to use 203k consultants and fund their costs into the loan for Limited loans," said Bill Evans, president of the Association of Renovation Consultants, in a letter to the FHA.
The departure of a large player in the space, in addition to procedural hurdles, contributed to diminished volume over time, said Polygon Research CEO Lyubomira "Val" Buresch.
"This trend was propelled by the exit of Wells Fargo in 2018 from this type of originations (they were originating over $1.1 billion per year in 2010, 2011, and 2012)," she said in an email. "Of course, there are other factors such as market conditions, operational complexity of this type of loan (lender approvals, loan officer training, compliance, etc.), and other similar products."
"In 2005, when FHA created the Limited 203(k), they cut out the consultant from that portion of the program. So a lot of these folks said, 'you know, I'm going to go find something else to do for a living,'" said Jim Bopp, vice president of national renovation lending at Planet Home, in an interview.
Limited 203(k) loans only can be used for nonstructural repairs up to $35,000 limit and they don't require a consultant, for whom borrowers pay financed fees of around $400-$1,000, charged on a sliding scale.
The $35,000 limit doesn't account for how high current expenses for materials have gotten, particularly with inflation, according to NAR and the community lenders association.
"As the cost of labor and supplies increase over time, our organizations recommend FHA increase the amount available to buyers and owners from $35,000 (or $50,000 if located within a Qualified Opportunity Zone) to match the market standard needed to facilitate renovations," the groups said in their letter to the FHA.
"(Many lenders) want to go to $50,000 (on the Limited 203(k) program as is already allowable with the Opportunity Zone feature of the program)," Bopp said, referencing the broader set of industry comments the FHA has received.
The perception of the Limited 203(k) as a more streamlined process has led many lenders to choose this option since its creation in 2005.
This in turn has led to lenders seeking to increase the dollar amount of repairs being allowed without the requirement to have a 203(k) consultant involved in the loan process.
But consultants provide necessary checks and balances, Bopp said.
At a high level, the consultant's role is to protect the borrower, lender, and FHA insurance fund by putting an expert in a position to oversee the construction budget and contracting work done.
Some commentators have suggested it could be helpful to the Limited 203(k) loan to add an option to finance the consultant fees into the loan as they can do on the standard 203(k), which isn't currently possible. This could help develop more talent in this area that could serve the broader market.
The FHA should "provide an option for lenders to use 203k consultants and fund their costs into the loan for Limited loans," said Bill Evans, president of the Association of Renovation Consultants, in a letter to the FHA.
The process for advances
Removing other procedural hurdles could help make 203(k) mortgages more attractive, according to NAR and the community lenders.
The largest, other than the consultant requirement, is the initial materials draw process, which involves funds paid from the repair escrow before a project is started rather than after its completion.
While waiting to pay later incentivizes contractors to complete projects, some do require some money upfront to do things like pay for materials needed to start the repairs.
The process involved in advancing for an FHA 203(k) loan is more restrictive than for some other renovation products offered by government-sponsored enterprises Fannie Mae and Freddie Mac, the Realtor and community lender groups noted.
"While FHA allows some costs to be advanced, the requirements for making initial advances are overly burdensome, preventing most homebuyers from selecting the Standard 203(k) loan. Fannie Mae and Freddie Mac allow for up to 50% of the estimated renovations costs to be advanced at the loan closing, with far fewer constraints," their letter noted.
Procedural complexities required include the need for two appraisals for some refinance transactions instead of simply using the "as repaired" value of the home. Some commentators would like to see that changed.
"It is often difficult for an appraiser to find as-is comparable sales given the rehabilitation work that is needed on subject properties. More broadly, it is difficult to see how this as-is valuation provides information that is particularly relevant for the transaction, given the as-repaired value will incorporate the adjusted as-is value," Pete Mills, senior vice president, residential policy and strategic industry engagement at the MBA, said in the group's letter.
The largest, other than the consultant requirement, is the initial materials draw process, which involves funds paid from the repair escrow before a project is started rather than after its completion.
While waiting to pay later incentivizes contractors to complete projects, some do require some money upfront to do things like pay for materials needed to start the repairs.
The process involved in advancing for an FHA 203(k) loan is more restrictive than for some other renovation products offered by government-sponsored enterprises Fannie Mae and Freddie Mac, the Realtor and community lender groups noted.
"While FHA allows some costs to be advanced, the requirements for making initial advances are overly burdensome, preventing most homebuyers from selecting the Standard 203(k) loan. Fannie Mae and Freddie Mac allow for up to 50% of the estimated renovations costs to be advanced at the loan closing, with far fewer constraints," their letter noted.
Procedural complexities required include the need for two appraisals for some refinance transactions instead of simply using the "as repaired" value of the home. Some commentators would like to see that changed.
"It is often difficult for an appraiser to find as-is comparable sales given the rehabilitation work that is needed on subject properties. More broadly, it is difficult to see how this as-is valuation provides information that is particularly relevant for the transaction, given the as-repaired value will incorporate the adjusted as-is value," Pete Mills, senior vice president, residential policy and strategic industry engagement at the MBA, said in the group's letter.
What makes the FHA program distinct
For all its products, not just the 203(k), FHA also generally charges a longer-term mortgage-insurance premium than the GSEs do. FHA recently cut part of that premium , but lenders would like to see it further reduced.
However, because other FHA parameters are friendlier to first-time buyers with lower incomes then Fannie's and Freddie's when it comes to qualifying, opening up the 203(k) program further could broaden both the number of people who can buy homes and the amount of affordable inventory that can be repaired by owner occupants. Homes in need of renovation are generally sold at a discounted rate, which can help new buyers searching for affordable properties if the renovations involved don't outweigh the price break.
"The FHA has more bandwidth for credit than the government-sponsored enterprises," Kim Curtis, president and CEO of Tidewater Home Funding said in an interview. "Making the 203(k) program more accessible also would be helpful to new buyers because housing finance agencies and community organizations typically won't allow their grants to be used for renovation."
And renovation is increasingly needed for U.S. housing as properties age. The average home in the United States was 40 years old in 2021, according toa recent National Association of Home Builders' study.
First-time buyers that gain access to properties through the FHA program also help to lower operating costs as a homeowner over time, Bopp said, noting that this also could help finance energy-efficient repairs and create more affordable housing that meets regulatory requirements for banks and other mandates for non-depositories.
"If you help finance the upgrade of all the home's mechanical systems, insulation, roofing, siding, and windows, you, in my opinion, more than double the chance that that homeowner is going to be successful because they don't have major repairs in the first 10 years," he said.
However, because other FHA parameters are friendlier to first-time buyers with lower incomes then Fannie's and Freddie's when it comes to qualifying, opening up the 203(k) program further could broaden both the number of people who can buy homes and the amount of affordable inventory that can be repaired by owner occupants. Homes in need of renovation are generally sold at a discounted rate, which can help new buyers searching for affordable properties if the renovations involved don't outweigh the price break.
"The FHA has more bandwidth for credit than the government-sponsored enterprises," Kim Curtis, president and CEO of Tidewater Home Funding said in an interview. "Making the 203(k) program more accessible also would be helpful to new buyers because housing finance agencies and community organizations typically won't allow their grants to be used for renovation."
And renovation is increasingly needed for U.S. housing as properties age. The average home in the United States was 40 years old in 2021, according to
First-time buyers that gain access to properties through the FHA program also help to lower operating costs as a homeowner over time, Bopp said, noting that this also could help finance energy-efficient repairs and create more affordable housing that meets regulatory requirements for banks and
"If you help finance the upgrade of all the home's mechanical systems, insulation, roofing, siding, and windows, you, in my opinion, more than double the chance that that homeowner is going to be successful because they don't have major repairs in the first 10 years," he said.
