FHA rules (24CFR Section 203.41) specifically allow restrictions imposed by government or nonprofit affordable housing programs intended to preserve affordability. The rule explicitly allows restrictions on resale price, requirements that homes be resold only to income-qualified buyers and requirements that owners occupy their homes as their primary residence. However, several issues in the language of this rule, interpretation of the rule in a subsequent mortgagee letter (94-2) and inconsistent interpretation of both by regional FHA staff have meant that most shared equity homeownership programs have not been able to take advantage of FHA insured mortgages. Difficulty in conforming with FHA requirements has also prevented shared equity homebuyers from participating in many state housing finance agency programs. Key program changes would include:
- Removing current requirements that prevent local program sponsors from effectively enforcing resale price and occupancy restrictions designed to protect public investment and preserve affordability. Unlike Fannie Mae and many local lenders, FHA prohibits program sponsors from taking enforcement action against homeowners when, for example, they illegally sublease their affordable units. This requirement undermines the public purpose of these programs without enhancing the lender or FHA’s security.
- Revising regulatory language intended to ensure a fair return to homeowners. As currently written the FHA regulations seem to require that price restricted homeowners be guaranteed a return of their full purchase price plus the full cost of all improvements (even when those improvements are decades old and no longer of value). FHA should develop a broader standard for evaluating fair return to sellers which accommodates a range of current best practices and recognizes the dual goals of building assets for homeowners and preserving affordability for future buyers.
- Developing a more streamlined and accessible system for reviewing local affordable homeownership programs and certifying that they meet FHA standards. FHA should consider working with Fannie Mae and Freddie Mac to create a single process for approval which would offer buyers greater flexibility in financing and help to standardize these local programs.
Download the full proposal: FHA and Shared Equity Homeownership-rev.3-20-09
The challenges of the current FHA policy were discussed on a recent webinar: Mortgage Financing Price Restricted Homebuyers which can be viewed online here.