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FHA pulls rug from under resident's retirement

By Jeff Collins, The Orange County Register on

Published in Senior Living Features

For 15 years, Judy Johnson planned to get a reverse mortgage when she retired, supplementing her Social Security with proceeds from her San Clemente condo.

But after she shut down her public relations business last year, Johnson discovered the government had pulled the rug out from under her retirement plans.

Her three-bedroom condo in Talega Gallery no longer qualified for Federal Housing Administration-insured loans. As a result, she can't get a reverse mortgage.

Even more aggravating is that Talega Gallery actually does not violate the FHA rules, which ban FHA financing for condos with private "transfer fees" paid to an activities fund when a home is sold. Neighboring associations in Talega pay those fees, but Talega Gallery does not.

"I protested. I said this isn't fair," said Johnson, a former White House press aide who helped President Richard Nixon write his memoir. "They said, 'We don't care.'"

Now she's living off savings and Social Security, with spending limited to the necessities. Fun and travel are outside her budget.

Community enhancement fees

For a variety of reasons, condo owners and condo shoppers have been blocked from getting FHA loans, typically one of the easiest types of mortgages to qualify for.

Insured by the federal government, these loans have low down payments, and borrowers can have less-than-perfect credit and still qualify. And FHA backs the lion's share of reverse mortgages.

For more than a decade, borrowers in the Talega and Ladera Ranch master-planned developments have been able to get FHA-backed loans, be it for a home purchase, to refinance an existing mortgage or for a reverse mortgage, local Realtors said.

But the agency reversed itself following a reinterpretation of its regulations in recent years, said Natalie Stewart, president of FHA Review, a Huntington Beach firm that helps condo boards get FHA certification, or eligibility.

The U.S. Department of Housing and Urban Development, which oversees FHA, found that communities like Talega and Ladera that tack a fee onto every home sale to pay for community activities violate long-standing FHA rules against private "transfer fees."

"It's a reinterpretation of a current law," Stewart said. "You cannot now freely transfer the property with a fee to another party" and still qualify for FHA funding.

Ladera Ranch and Talega charge a quarter of 1 percent of a home's sale price -- or $1,250 on a $500,000 deal -- to raise money for community parties, concerts, children's activities and newsletters.

The FHA began turning down loan applications for those areas in the spring of 2015, Stewart said.

A new law

Another president may have come to the rescue of former Nixon aide Judy Johnson.

President Barack Obama signed a new bill into law July 29 that could ease FHA financing for thousands of home shoppers relying on the more affordable condo market.

Called HR3700, the measure revises FHA rules for condos, making it easier for more condo associations to get FHA certification. The new provisions also would eliminate private transfer fees like Talega's and Ladera's as an obstacle to FHA funding.

And because FHA-insured loans represent the lion's share of reverse mortgages, it could provide relief to senior condo owners like Johnson, putting a comfortable retirement back in reach.

 

But HR3700 is subject to final rules FHA is drafting within the next three months. So Johnson and others in Ladera and Talega won't know until late October if their communities will again become eligible for FHA-backed loans.

Will she get her reverse mortgage?

Under a reverse mortgage, the loan is paid out monthly, so the borrower gets a monthly check rather than sending in a monthly payment to the bank.

Johnson purchased a condo in 2001 in Talega Gallery, a senior housing development within the Talega master association. The 55-plus community of about 40 condos and around 240 houses is the only homeowners association in Talega that's exempt from paying the "community enhancement fee."

Johnson verified her plan before she bought her condo: Getting a reverse mortgage would not be a problem.

"I was 10 to 15 years from retirement, and I needed to figure how I would take care of myself when I got old and crotchety," Johnson said. "I decided to plow all my money into my home."

But members of the local Realtor association learned in early 2015 that FHA stopped backing loans in Ladera and Talega. A HUD spokesman couldn't explain why -- apart from saying that the transfer fees violated longstanding FHA rules.

In January 2015, Johnson retired and began shopping for a reverse mortgage.

At first, brokers were excited to see her.

"I talked to tons of people, and every person said, 'You are exactly the type of person reverse mortgages were meant to help,'" Johnson said. "However, when I said I could not get an FHA loan, it was a buzzkill on the conversation."

She appealed FHA's ruling to HUD. The lifestyle fee did not apply to her unit.

But HUD ruled that as long as it's part of the Talega master association, her home would not qualify for an FHA mortgage.

She could tap the equity in her condo by other means. She could sell the home she loves and buy elsewhere. Or she could take out a conventional mortgage. All the other options come with steeper up-front costs.

With just her Social Security check as income, she lives very frugally, she said.

"I have the greatest house with a lot of equity in it. I mean, hundreds of thousands of dollars. And I live on Social Security," Johnson said. "So I'm a poor church mouse."

Contact the writer: 714-796-7734 or jcollins@ocregister.com

(c)2016 The Orange County Register (Santa Ana, Calif.)

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