FHA

The recent historic drop of mortgage rates has created a refinancing boom for qualified homeowners. Unfortunately, the refinancing wave washing over the country has paradoxically left dry homeowners who would most benefit:  those who are “underwater.” Underwater mortgages, or “negative equity” (i.e., they owe more on the mortgage than the property is worth) cause foreclosures and serves to bottle up the housing market. Thus, assisting homeowners who are underwater on their mortgage is good public policy. According to a CoreLogic study, there are currently 11 million mortgages underwater and another 2 million nearly at negative equity in the US housing market – a figure that comprises 28% of all residential properties with a mortgage. In Massachusetts, there are 225,000 properties with negative equity and another 52,000 with near negative equity.

The government has made attempts to address this crisis. Last year the Obama Administration created a loan modification program, the Home Affordable Refinance Program, to help refinance borrowers whose loans were worth up to 125% of their homes value. The program did not take hold, and only a relatively minor number of modifications/refinances occurred.

Writing in yesterday’s New York Times, former chairman of the President’s Council of Economic Advisors and current Dean of Columbia Business School Glenn Hubbard penned an intriguing column proposing easier refinancing of underwater mortgages.

Under the proposal, quasi-governmental entities like Fannie Mae, Freddie Mac, the FHA, and the VA would require loan servicers:

  • To send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork.
  • Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to the taxpayers.
  • The agencies would issue new mortgage-backed securities to cover the refinanced mortgages, using the proceeds to pay off the loans held in the existing securities.

The proposal also mandates that existing second lien holders provide a subordination agreement (which benefits the holder because it lowers the default risk).

The program would have immediate benefits: a distressed homeowner could save approximately 15% in their monthly mortgage payment, which would greatly help homeowner’s through the current crisis.

Is there a guarantee that this modification will become law? No, there is not, but it certainly makes sense for policymakers to move on it right away.

In the words of Glen Hubbard, “[i]f we can lower mortgage payments for struggling homeowners, it will reduce future foreclosures on federally backed loans, providing savings to the taxpayers.” And that’s a good thing for everyone.

{ 1 comment }

The mortgage lending underwriting environment has changed dramatically in the last several years. At the peak of the bubble, mortgage professionals joked that you needed only to be able to fog a mirror to get a loan. These days, even borrowers with good incomes and good credit scores can get turned down.

Much of the change is driven by the stricter underwriting standards imposed by Fannie Mae, Freddie Mac and FHA. There are two major issues which come up repeatedly in transactions today which can derail a borrower’s loan: (1) extensive home repairs, and (2) a low appraisal.

The house requires substantial repairs

A lot of properties on the market these days are foreclosures owned by banks, short sales, or otherwise aren’t in great repair. Further, in a buyer’s market, sellers will not hesitate to agree to a list of repairs.

Broken windows, defective appliances, roof leaks, unfinished renovations, and serious water damage can all cause problems with obtaining final lender approval of the loan. At worst, the a substantial amount of required repairs could cause a lender to bail out. At best, the lender will require a pre-closing inspection and make the loan commitment subject to the satisfactory completion of all work.

Talk to your lender before the purchase and sale agreement is signed to figure out the extent to which substantial repairs will affect the underwriting process.

The appraisal is lower than the purchase price

Occasionally during the bubble an appraiser would decide a home was worth less than the price a buyer and seller had agreed upon. But that was relatively rare. Critics accused appraisers of colluding with lenders to “hit the number” — deliver the values needed for loans to be approved.

These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals cannot select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price. Even if the first appraisal goes well, a second evaluation — known as the review appraisal and now ordered by most investors that buy home loans — may not.

Today buyers, sellers and their agents often attempt to manage the appraisal process by recommending better comparable sales available than the ones the appraiser used. As a buyer’s attorney, I always negotiate an “out” in the purchase and sale agreement for the buyer’s protection in case the appraisal comes in too “low.” If the appraisal remains under the purchase price, buyers may need to reopen negotiations with the seller or come up with a bigger down payment to make a deal work — or pay down their mortgage in order to refinance.

Have you felt the change when you have tried to get a loan?

{ 0 comments }

“Walls In” Condo Unit Coverage Required By Many Lenders

A HO-6 policy is like a regular homeowner’s policy, but for a condominium unit, and with a lot more extras. HO-6 insurance policies cover the interior of the unit and personal property inside–commonly known as “studs in” or “walls in” coverage.

HO-6 Now Required By Lenders

Under the new Fannie Mae (FNMA) and FHA overhaul of condominium lending guidelines, lenders are now requiring HO-6 policies for new condo unit purchases. Sounds like common sense, but HO-6 policies weren’t always required by lenders, and many condominium unit owners were under the mistaken impression that the master condominium insurance policy covered all damage to the interior of their unit as well as damage to furniture, appliances, etc. That isn’t so. In most cases, that master insurance policy covers common areas such as the hallways, roof, basement, elevator, boiler, and common walkways, for both liability and physical damage–but not the inside of units.

Coverages

HO-6 policy benefits include:

  • Coverage for damage to personal property such as furniture, computer equipment and clothing
  • Fill in the gaps of the master insurance policy and cover losses under master policy deductibles
  • Personal liability coverage
  • Interior walls and floor coverings coverage
  • Coverage for improvements or upgrades (most master insurance policies only cover the original condition and value of the unit).
  • Usually has small deductible and fairly inexpensive

Under the new lending rules, an HO-6 insurance policy must provide coverage for no less than 20% of the condominium unit’s appraised value.

High Deductible Protection

Another benefit of obtaining an HO-6 policy is that in certain situations, it will provide gap coverage caused by the often high deductibles on a master insurance policy. These days, condominium associations have been cutting costs by increasing their deductibles, anywhere from $10,000 to even $50,000. What’s more, condominium documents often provide that the unit owner is responsible for losses falling below the deductible. A well-tailored HO-6 policy will protect you in this situation. Here is a good article about the tug-of-war on deductibles.

Loss Assessments

HO-6 policies can also provide coverage for assessments applied an individual unit due to a direct loss to the condominium. The loss must be a “peril” covered under the unit owner’s individual policy, not be levied by a governmental agency, and not be related to earthquake damage. A standard condo policy typically includes up to $1,000 in loss assessment coverage. Additional coverage can be covered for a nominal amount.

The HO-6 policy is a must have for every condominium owner!

If you need an HO-6 policy, please contact my good friend, Kate Kissane at Morrill Insurance in Sudbury, MA. Email: k.kissane@morillinsurance.com or tel: 978-443-9912. 

{ 24 comments }

brownstone1.jpgBuying a condominium unit can be more involved than buying a single family home. This is because you have to worry about both the unit itself and the condominium project as a whole.

10 Questions You Must Ask Before Purchasing A Condominium Unit

To borrow from a famous phrase, not all condominiums are created equally. Some condominiums are very well run; some are quite poorly run and underfunded. Buyers interested in purchasing a condominium unit must do their homework:  not only about the condition of the individual unit they are interested in purchasing, but on the financial health and governance of the condominium as a whole. Remember, you are buying into the entire project as much as you are the unit, and your decision will impact your daily living and your ability to re-sell.

Here are the 10 questions buyers should ask when deciding to purchase a condominium unit:

  1. What is the monthly condominium fee and what does it pay for? The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it.
  2. What are the condominium rules & regulations? Condominium rules can prohibit pets, your ability to rent out the unit, and perform renovations. Make sure you carefully review the rules and regulations before buying.  Needless to say, the buyer’s attorney should review and approval all condominium documents, including the master deed, declaration of trust/by-laws, covenants, unit deed and floor plans to ensure compliance with state condominium laws as well as Fannie Mae and FHA guidelines, as necessary.
  3. How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment.  Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
  4. Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands, others like the Boston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit.  It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condomininium.
  5. Is there a professional management company or is the association self-managed? Usually, a professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. But for smaller condominiums, self-management works just fine.
  6. Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Legal action equals attorneys’ fees which are payable out of the condominium budget and could result in a special assessment.  In some states, you can run a search of the condominium association in the court database to check if they’ve been involved in recent lawsuits.
  7. How many units are owner occupied? A large percentage of renters can create unwanted noise and neighbor issues. It can also raise re-sale and financing  issues with the new Fannie Mae and FHA condominium regulations which limit owner-occupancy rates. If your buyer is using conventional financing, check if it is a Fannie Mae approved condo. If FHA financing, check if it’s an FHA approved condo. (Thanks mortgage specialist Lou Corcoran for the links)
  8. What is the condominium fee delinquency rate? Again, a signal of financial trouble, and Fannie Mae and FHA want to see the rate at 15% or less.
  9. Do unit owners have exclusive easements or right to use certain common areas such as porches, decks, storage spaces and parking spaces? Condominiums differ as to how they structure the “ownership” of certain amenities such as roof decks, porches, storage spaces and parking spaces. Sometimes, they are truly “deeded” with the unit, so the unit owner has sole responsibility for maintenance and repairs. Sometimes, they are common areas in which the unit owner has the exclusive right to use, but the maintenance and repair is left with the association.  Review the Master Deed and Unit Deed on this one.
  10. What Does The Master Insurance Policy Cover? The condominium should have up to $1M or more in coverage under their master condominium policy. For buyer’s own protection, they should always buy an individual HO-6 policy covering the interior and contents of the unit, because the master policy and condo by-laws may not cover all damage to their personal possessions and interior damage in case of a roof leak, water pipe burst or other problem arising from a common area element. Ask for a copy of the master insurance policy and don’t forget to check the fine print of the by-laws. Sometimes, there’s language that would hurt a unit owner in case of a common area casualty. Condominiums over 20 units should also have fidelity insurance to protect against embezzlement.

I posted this list on the Realtor ActiveRain website and it was the featured post, generating a slew of great comments from real estate brokers around the country.

Of course, a good real estate attorney will help buyers and their realtors with this “due diligence.” As part of our standard condominium representation, we will review the following condominium documents and issues:

  • Master Deed and amendments
  • Declaration of Trust/By-Laws, Rules & Regulations
  • HOA Covenants/Restrictions
  • Unit Deed and Floor Plans
  • Condominium Budget and Capital Reserve Fund
  • Fannie Mae/FHA Compliance Provisions
  • Condominium Annual and Special Meeting Minutes
  • Pending or Contemplated Special Assessments or Litigation

We will also build in provisions into your purchase and sale agreement to protect you in case there are unanticipated or undisclosed issues with the condominium which affect your willingness to move forward with the transaction. Happy condo hunting!

{ 4 comments }

I’m pleased to welcome back guest blogger, David M. Gaffin, a licensed Loan Officer with Greenpark Mortgage Corp. of Needham MA. You can visit him at Greenpark Mortgage or through his LinkedIn profile.

Dave is here to talk about USDA loans which are, surprisingly, available in such *rural* areas of Massachusetts such as Hopkinton, Sudbury, Ashland, South Shore, Cape Cod and many other communities.

Due to the mortgage meltdown that has plagued our county for the past couple of years, lending guidelines have tightened significantly and obtaining a home loan has been more akin to giving birth. In fact, it seems that many lenders want your first born in order to complete the transaction. Low down payment and no down payment loans vanished from the landscape, unless you really knew who to speak with. FHA became the buzzword and savior to those with less than a 10% down payment in a declining real estate market.

Now that FHA is more mainstream (requiring only a 3.5% down payment and having very generous credit and debt tolerances), many think this is the only alternative to the traditional Fannie/Freddie loan.

However, there are some little known loan programs available from the United States Department of Agriculture (USDA) that could benefit borrowers in many parts of Massachusetts and beyond. Known as the Guaranteed Rural Development Housing Section 502 Loans, these programs are designed for low to moderate income individuals or households purchasing a property in a “rural” community. The definition of rural is surprising, as you will see from the list of eligible communities in Massachusetts.

Massachusetts communities eligible for the rural loan include: Ashland, Hopkinton, Sherborn, Sudbury, Maynard, Littleton, Harvard and most of central and western Mass. Most of the South Shore and virtually all of Cape Cod are considered “rural” for this program as well. To see an interactive map of eligible Massachusetts communities follow this link.

There are some exceptional features to these programs, as well as some needed conservative features. Program Features include:

  • No Down-payment
  • No Monthly Mortgage Insurance
  • Unlimited Seller Contributions
  • The ability to repair certain aspects of the property and build in those costs into the total loan.

To be eligible to purchase a home with a Rural Housing loan, borrowers must meet income eligibility requirements.  Here is the link for Massachusetts.  For example, in the Boston-Cambridge-Quincy MSA (which includes most of Middlesex, Norfolk and Suffolk Counties) for Moderate Income a 1-4 person household’s income cannot exceed $95,100. For a 5+ household income cannot exceed $125,550.

Like FHA, the USDA programs requires an upfront fee of 2% that will guarantee the loan for the lender. FHA will allow the borrower to finance the upfront mortgage insurance premium (MIP) (currently 1.75% of the base loan, but scheduled to rise to 2.25% in April). In addition FHA will be reducing the allowable seller contributions from 6% to 3%. USDA will allow the upfront fee to be financed only if the appraised value of the home is greater than the purchase price.

Let’s look at the differences between FHA and USDA loans side by side:

USDA v. FHA FHA USDA
Appraised Value $200,000 $200,000
Purchase Price $175,000 $175,000
Down Payment 3.5% FHA $6,125 $0
Upfront Fee 2.25% FHA 2% USDA $3,800 $3,500
Monthly Mortgage Insurance $77 $0
Allowable Seller Contributions $6,000 $25,000
*Assumes $200 monthly taxes and $50 monthly homeowners insurance.  Interest rate of 5.50%, $400 monthly consumer debt

As you can see, with the upcoming FHA changes, the USDA loan requires less out of pocket, a lower guaranty fee and greater flexibility in managing the closing costs associated with the transaction.

The USDA loan is more conservative in qualifying than FHA, but that is probably a good thing. FHA, with its looser guidelines, is in trouble and may need the dreaded taxpayer bailout. FHA’s overall percentage of loan activity has increased from roughly 3% of closed loans to about 40%. With no minimum credit score and debt to income limits of 55%, the fact that folks are defaulting on these loans and FHA has tightened its requirements is not surprising.

David Gaffin, Greenpark Mortgage

USDA qualifies borrowers with more traditional debt ratios of 29% for housing and 41% for overall indebtedness. This is good for the borrower, who will not bite off more than they can chew, and for the taxpayer as the default rate on these loans is less than FHA. However, you will need to earn a higher income to qualify for the same house with USDA than FHA.

So, what do you do if you want more information about these loans?  Start by visiting the USDA program page.

You may also contact me with any questions you may have at dgaffin@greeparkmortgage.com.

Greenpark Mortgage Corp. is licensed to originate USDA loans in Massachusetts, Maine, New Hampshire, Vermont, Connecticut, Rhode Island and Florida.

Wow, what a great post Dave. I never knew about this program and its availability in some of the most toniest “rural” towns in Massachusetts.

{ 0 comments }

I’m happy to welcome guest blogger, Patrick Maddigan, Esq.,the Director of Operations and Business Development at our new entity, TitleHub Closing Services. Pat is writing today on the new FHA lending changes.

On January 20th, the Federal Housing Administration (FHA) announced it would tighten certain lending requirements and guidelines with the purpose of reducing risk and improving its weakening financial health. The changes include:

  • Borrowers must pay an increased upfront mortgage insurance premium (MIP) of  2.25% of the loan amount (increased by 50 basis points from 1.75%). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.
  • For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10% (up from 3.5%).
  • Seller credits for closing costs are cut by 50% and cannot exceed 3% of the purchase price.
  • FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.

The formal Mortgagee Letter released by FHA can be found here. FHA has not announced a firm date on which the proposed changes will be effective, though they are expected to go into effect in either spring or summer.

The Rising Tide Of FHA Loans

With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have become extremely popular. FHA loans, which feature low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores. In 2009, approximately $290 billion in FHA loans were issued, up nearly 500% from 2007. Despite the housing downturn and credit crunch, FHA mortgages have continued to grow, thanks in part to incentives like the First Time Home-Buyers Credit. In anticipation of the continued increase in interest and demand for FHA mortgages, HUD is requesting $400 Billion for the expected flood of FHA loan applications in 2010. The dramatic rise in FHA backed loans, however, has caused the steady depletion of FHA reserves, putting the agency at greater risk of financial distress and even collapse. Regulators proposed the changes outlined here as  to ensure its long-term financial integrity while positively impacting the ailing housing market.

Two of the recently announced changes in FHA loans will have a clear effect upon buyers in the more immediate future- the rise in upfront mortgage insurance premiums (UFMIPs) and the FICO/minimum down payment adjustments.

Up-Front Mortgage Insurance Premiums Increased To 2.25%

The first change that will immediately impact borrowers is the FHA’s increase of the required up-front mortgage insurance premium by 50 basis points to 2.25% of the base loan amount. This change is effective beginning April 5, 2010.

FHA requires two types of mortgage insurance premiums (known in the industry as a MIP): an up-front and an annual. The MIP is similar to private mortgage insurance, or PMI, for borrowers investing less than a 20% down payment. The MIP amount is based on a percentage of the remaining debt on the FHA loan, so as the mortgage is paid down, the MIP will decrease. Unlike private mortgage insurance, FHA borrowers are able to finance the MIP into the loan, thereby spreading the cost over many years. The “annual” MIP is termed annual but paid monthly as part of the loan payment.

For a $300,000 loan, the increase in the MIP fee would add approximately $1,447 to the loan amount, not a huge amount, but nothing to sneeze about when financed over a 30 year loan term. 

Minimum FICO Credit Score/10% Down Payment for New Borrowers

New borrowers will now be required to have a minimum FICO credit score of 580 to qualify for FHA’s 3.5% down payment program. Borrowers with a credit score below 580, while still able to qualify for a FHA loan, must now put down at least 10% of the purchase price–an amount that may be prohibitive for many borrowers with poor credit.

Until now, there has been no minimum FICO score requirement imposed by FHA, however some lenders who fund FHA loans have previously imposed their own requirements (often lenders would not work with credit scores under a 620), so the net effect of this change may not be that significant. While this will preclude some of the underserved community the FHA is seeking to help, it will better balance the FHA’s risk levels and still continue to allow borrowers who have historically performed well to access the benefits of an FHA loan.

Patrick Maddigan, Esq.

Impact Of The Changes

The FHA is making an effort to lower its overall risk and improve the financial soundness of its insured loans, which in turn allows for the continued support of home buying in the United States. In doing so the FHA must find a way to keep their insurance fund’s capital ratio returns above the Congressionally mandated 2%, while continuing on their overall mission of aiding borrowers in underserved communities and facilitating the recovery of the housing market

These changes, along with the other FHA reforms (including a reduction in allowable seller concessions and significant changes and oversight for lenders) will have varying effects on borrowers interested in a FHA loan. For borrowers with low credit scores, some of these changes, such as the higher down payment percentage, will significantly affect their ability to buy a home. In the short term, the changes may motivate borrowers to lock into the old FHA guidelines before the new changes become effective.

If you are interested in an FHA loan, click here to Find An FHA Approved Lender In Your Area.

Thanks for the great information Pat! We’ll be seeing more of you around here hopefully.

If you wish to speak with a very knowledgeable mortgage lender about an FHA loan, we recommend that you contact David Gaffin at Greenpark Mortgage.

{ 1 comment }

In the spirit of the New Year, let’s look back at the top legal issues of the past year and peer into the crystal ball for a glimpse at 2010.

Top 5 Posts For 2009

#1.  The Catch-22 Impact of New Fannie Mae Condominium Regulations. In January, Fannie Mae was the first government agency to drop a big bucket of cold water on condominium lending underwriting practices which some say contributed to the condominium market meltdown. FHA and others would follow later in the year. The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie Mae imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.

#2.  New FHA Condominium Lending Guidelines Sure To Slow Financing and Chill Sales. The Federal Housing Administration (FHA) followed Fannie’s lead in tightening condominium lending requirements. Originally proposed over the summer, FHA delayed implementation of the new guidelines until earlier in the month and watered down some of the most stringent requirements, after major lenders and community association groups complained.

#3.  There’s Nothing Standard About The Massachusetts Standard Purchase and Sale Agreement. Great to see a post about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps? Check out this post for the ins and outs of the very seller friendly standard form P&S and how to level the playing field if you are a buyer.

#4.  Massachusetts Land Court Reaffirms Controversial Ibanez Decision Invalidating Thousands of Foreclosures. If you were following the foreclosure mess, you couldn’t have missed this judicial bomb dropped by Massachusetts Land Court Judge Keith Long. The so-called Ibanez ruling invalidated thousands of foreclosures across the state because the lenders did not record their paperwork up to date at the registries of deeds. Lenders have appealed the ruling, but hundreds of foreclosure titles remain unmarketable in the wake of this controversial decision. More to come in 2010.

#5.  Short Sales Get Boost From New Obama Treasury Guidelines. On December 1, the Obama administration set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed.

Honorable Mention. I would be remiss if I didn’t mention the new RESPA guidelines and the new Good Faith Estimate and HUD-1 Settlement Statement which go into effect Jan. 1, 2010.

2010 — The Year We Rebound

The Massachusetts Real Estate and Mortgage Market

All signs are pointing to a real estate rebound for the Bay State in 2010, with home and condominium sales surging over 50% from last year in November. I have definitely seen an uptick in new purchases on my end and we are preparing for a busy 2010. Along with good news from the real estate market, however, comes higher interest rates as the bond market reacts to positive news. My friend mortgage consultant Brian Cavanaugh at SmarterBorrowing.com does a good weekly mortgage market update and is presently advising borrowers to lock into current rates as he predicts rates will rise in 2010 to close to 6% for a 30 year fixed. Of course, when rates go up, buying power goes down, thereby cooling the market a bit.

Regulatory

Hopefully we’ve seen the end of increased regulation of the condominium market from the government giants. Let’s toast that they can let the market take its course with the new guidelines in effect.

Stimulus/Home Buyer Credit

As the economy continues to recover, you can probably bet that the Obama administration is going to let up on the stimulus/credit throttle for 2010. So take advantage of all the credits available now, because this is probably the last you will see of them for awhile.

Housing

On the housing front, Massachusetts builders are reportedly foregoing McMansions in favor of  the more affordable middle market of homes in the $400,000 to $600,000 price range. Finally!

Technology

Lastly, technology, the internet and social media will play an even bigger role in how realtors, lenders and real estate attorneys do business. The National Association of Realtors says that 87% of home buyers use the Internet to search for homes. I tell all my Realtor friends they must have a strong Internet presence and to take advantage of blogging, social media and Active Rain to boost their online presence.

For attorneys, in 2009 we saw the tip of the iceberg for electronic recordings and closings as well as online transaction management. Our office just set up an online transaction management system where buyers, sellers, loan officers and realtors can view the status of the loan whenever they want through a secure online portal. It’s a fantastic tool. While electronic closings are a way’s away from gaining the necessary critical mass of lender acceptance, many Massachusetts registries of deeds are now e-recording, and that will continue to rise. The next decade will certainly bring electronic closings and paperless transactions into the norm.

Well, let’s clink our glasses to a very happy, healthy and fruitful New Year!

{ 0 comments }

I’m getting pretty tired of all the condominium developers and realtors out there claiming and clamoring that the new FHA condominium guidelines which went into effect this week are the next coming of the Apocalypse. The fact remains that the new guidelines will ensure that condominiums are financially sound and well-run, and that’s good news for everyone: lenders, consumers, buyers, unit owners and realtors alike.

David Fletcher, a Florida real estate broker and former developer who has survived every recession since the 1970’s, gets it. In an article in Realty Times yesterday, he outlines 10 benefits of the new rules, especially from a sales and marketing perspective:

  1. More buyers will enter the market because they can afford the lower down payment.
  2. No single investor can purchase more than 10% of the units, so the idea of a controlled association by one or two investors is no longer a threat.
  3. More inventory will offer wider choices tending to keep prices in check, as “FHA approved’ condominiums come on line.
  4. More real estate agents will be willing to show condominiums to their buyers, because the lender who provides the mortgage will have to approve not only the condo documents, but the condo association’s budget, reserve account and its fidelity insurance policy.
  5. New construction developers have the guidelines needed to create urgency in their pricing strategies, which is key to building and maintaining momentum.
  6. Commercial lenders will have a more comfortable level with developers. While the 50% presale requirement may look obtrusive, it is actually a benefit to the developer, because it will create urgency for buyers to purchase.
  7. Established associations that have dragged their feet to get their finances in order, now have a valid value-based reason to become “FHA Approved.”
  8. Real estate agents will show FHA approved condominiums with confidence in the association’s finances, not just because the down payment is low.
  9. Forward thinking lenders will hustle to become a “an approved lender’ in resale and new communities alike
  10. Knowing the property already has approved lenders will make competition for listings tighter and will attract more buyers and more prospects to the listing.

David believes — and I agree with him — that “FHA Approved” will become one of the most sought after seals of approvals for condominiums in 2010 and beyond. Let’s hope that all the realtors, lenders, and condominium developers out there realize the benefits that can be gained from obtaining FHA approved status.

{ 2 comments }

Today, the controversial Federal Housing Administration (FHA) condominium mortgage rules go into effect. I’ve written about them extensively on this blog here. The new FHA rules, in summary, require that condominiums undergo a much more rigorous financial review prior to being accepted into FHA mortgage programs.  Sort of like a cardiac stress test for condominiums.

I was interviewed this morning by Associated Press real estate reporter Alan Zibel about the impact of the changes. I said that despite the short term hurt on lenders and the extensive underwriting required, I believe they are a good thing for consumers and condominium buyers because they require condominiums to get their financial collective acts together.  Mr. Zibel graciously quoted me in the article:

While the rules could be tough for builders, they will protect consumers because lenders will be forced to be more careful about which projects they fund, said Richard Vetstein, a real estate lawyer in Framingham, Mass. “On the whole, it’s a good thing,” he said. “Financially sound condominiums make better investments.”

Here’s a direct link to the AP story as reprinted in the Los Angeles Times.

The AP article also touched on the difficulty new condominium developers face with the tougher rules. A Utah condo developer, who shelved a 300 unit project in favor of free standing homes, characterized the new rules as a “debacle.” But the FHA already watered down the new rules from those previously proposed, so builders could be dealing with far worse. On the whole, I think the rules are fair, balanced, and unfortunately necessary in light of the condominium meltdown in states such as Florida and California.

Today’s hurt is tomorrow’s gain….

{ 0 comments }

After several revisions and delays, the Federal Housing Administration (FHA) has finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium projects. FHA first proposed the revisions back in June (under Mortgagee Letter 2009-19). The new guidelines are effective December 7, 2009; however, some of the requirements are phased in through January 31, 2010.

There has been a considerable amount of controversy involving HUD/FHA’s proposed requirements for obtaining FHA mortgage insurance for condominiums. The newest guideline revisions are in response to the strong reaction from condominium associations and mortgage industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.

The latest guidelines are described in two separate HUD/FHA documents:

  • Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects)
  • Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

Under the Temporary Guidance:

  • The “Spot Loan” approval process will continue through February 1, 2010, after which it will be replaced by the new Direct Endorsement Lender Review & Approval Process (DELRAP); and
  • The 30% cap on FHA loans per condo project will be expanded to 50% until December 31, 2010. Concentrations may be increased to 100% if certain additional conditions are met. After January 1, 2011, the cap reverts back to 30%.

The highlights of the New Guidelines are as follows:

  • Condominium project approval is not required for condominiums comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
  • Until December 31, 2010, at least 30% pre-sale level must be reached before any FHA mortgage can be granted on any unit. After 12/31/10, 50% pre-sale level must be reached.
  • 50% owner occupancy rate for the entire project.
  • No more than 15% of unit owners can be delinquent (over 30 days late) on their condominium fees.
  • Capital reserve funding:  The reserve study requirement has been eliminated, along with the requirement of at least 60% of the fully funded reserves. The new requirement requires merely that at least 10% of the association’s annual budget be set aside for reserves.
  • Budget review:  Lenders must review the condominium budget to determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
  • No more than 25% of space allocated to commercial use.
  • No more than 10% of units held by a single investor.
  • The 1-year waiting period for conversion condominiums is eliminated.
  • Unit owners must obtain individual HO-6 insurance policies if the master policy doesn’t cover unit interiors.
  • Fidelity insurance must be obtained for 20+ unit projects.
  • Re-certification required every 2 years.

Transition Strategy:

  • FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
  • Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
  • Projects that received approval between October 1, 2008 and December 7, 2009, will be “grandfathered” and will have to follow the new guidelines’ recertification process (recertification required every two years).

couple-homeAnalysis:

Although the condominium association and mortgage lobby were successful in watering down some the more onerous requirements, the new revised guidelines will still represent a major change in how lenders underwrite condominium mortgages. Lenders will have to perform much more extensive due diligence on condominium projects than before.

The new guidelines will also force existing condominium associations to really get their acts together, especially with their unpaid condominium fees, budgets, insurance and capital reserve accounts. FHA mortgage programs are becoming the first choice for first time home buyers, and condominium units are particularly suitable for first timers. I have already seen situations where condominium trustees feel no obligation to comply with FHA (and Fannie Mae) guidelines in connection with a proposal sale of a unit, and it is not a good situation. Condominium trustees and association can certainly open themselves up to liability if they don’t cooperate and maintain the marketability of the units which they govern. Trustees owe unit owners a fiduciary obligation to get their associations in compliance with all new FHA/FNMA guidelines, in my opinion.

For condominium associations, the Community Associations Institute has published this helpful “Head’s Up” and FAQ.

As always, contact Richard Vetstein with any questions.

{ 10 comments }

New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act known as RESPA aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations.

The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.

Highlights of the new changes include:

  • Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
  • Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
  • Lenders have the option of providing borrowers with a list of approved service providers such as closing attorneys and title insurance companies.
  • A tolerance range has been specified for various categories of loan/closing costs to prevent unnecessary escalation of promised vs. actual charges.
    • Fees quoted for lender origination charge cannot change.
    • Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
    • Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
  • The final page of the GFE contains worksheet-like charges to compare different loans and terms that the borrower can use to shop pricing.
  • Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed in a standard manner.
  • The charges quoted on the GFE are then carried over to the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.

Here is a link to the new Good Faith Estimate (GFE) form and a link to the new HUD-1 Settlement Statement form.  The most recent FAQ from HUD (last updated 1.28.10) can be found here.

I think that overall the changes will provide consumers with greater disclosure and transparency of the myriad loan closing fees and costs in a typical real estate purchase.  It also creates an incentive for lenders to assemble a competitively priced team of preferred settlement service providers, so it can guarantee to its customers that the price of the preferred vendors’ settlement services will never increase by more than 10% at closing.  If borrowers aren’t happy with that, they are free to shop and find a better deal themselves.

I plan to do a series of upcoming posts on this important RESPA reform, highlighting the salient sections of the new GFE and HUD-1. As always, contact Richard Vetstein with any questions.

Please read my second post in this series, New RESPA Rules 2010: Disclosure of Settlement Services, Attorneys Fees and Title Insurance.

For all the posts in the RESPA series, click here.

{ 4 comments }

Update: 11/10/09–FHA Issues Final Revised Guidelines–Spot Approvals Extended Until Feb. 1, 2010

With an eye on the “volatility” of the condo market, the Federal Housing Administration (FHA) has backed off some of the stingy new rules for condominium lending set to be implemented Dec. 7.

After a meeting with the Mortgage Bankers Association last week, the FHA made the following changes to its June 12 condominium guidance letter in a new letter dated Nov. 6:

  • Spot loan approvals can continue until Feb. 1, 2010.
  • The FHA will allow a 50 % concentration of FHA loans – up from 30 %- in condominium buildings, and well-qualified buildings can have up to 100 %.
  • A 50 % owner-occupancy requirement for new condo projects.
  • The pre-sale requirement has been reduced to 30 % of new projects.
  • Reserve study requirement eliminated.  Condominium budget must provide for funding reserve account for at least 10% of operating budget

The original implementation date for new condo rules was Nov. 1, but that date was pushed back to Dec. 7. The above rules, except the spot loan approval, are all labeled as “temporary,” effective through Dec. 30 – although the FHA reserves the right to extend that date.

A copy of the new guidelines can be found here.

As always, contact Richard Vetstein with any questions.

{ 1 comment }

Update: 11/10/09–THESE RULES HAVE CHANGED. Please see my post: FHA Issues Final Revised Guidelines–Spot Approvals Extended Until Feb. 1, 2010

Update: 10/26/09–The FHA Has Delayed Implementation Of New Rules Until December 7, 2009

Under revised guidelines which were to be effective October 1, 2009 but now delayed until November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. The guidelines are very similar to the new Fannie Mae regulations issued earlier in the year. Some “highlights” of the new regulations include that all FHA approved condominium projects have at least a 50% level of owner occupancy or sell out, no more than a 15% condo fee delinquency rate and a capital reserve study, among other requirements. There is also a little known requirement for an affirmative action housing plan for new construction and conversions. The FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers’ ability to obtain FHA mortgages for condominium units.

For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.

To obtain a FHA mortgage on a condominium, the project must be FHA approved. Prior to these changes, there were two ways a condominium could be FHA approved: (1) full project approval, and (2) “spot” approval. Full project approval means that FHA has already done the approval on the entire condominium. Spot approvals were performed on non-FHA approved projects on a loan by loan basis, and were a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process.

No More Spot Approvals

Under the new guidelines, the popular spot approval process will no longer be available and will be replaced with an entirely new process called Direct Endorsement Lender Review and Approval Process (DELRA). FHA claims the DELRA process is more uniform and streamlined that the former spot loan approval process, but that remains to be seen. The good thing is that lenders will retain the ability, like the former spot approval process, to underwrite FHA loans on non-FHA approved projects, albeit with tighter guidelines.

The new regulations also limit the duration of full project approvals to two years. Thus, even approved condominiums must re-certify every 2 years.

New Project Eligibility Guidelines

Under the new project eligibility requirements, all condominiums (consisting of 2 or more units) must meet the following requirements:

  • At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 % of the number of presold units (the minimum pre-sale requirement of 50 percent still applies).
  • Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
  • At least 50% of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
  • No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
  • No more than 25% of the property’s total floor area in a project can be used for commercial purposes.  The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
  • Reserve Study – a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed. The regulations fail to define what is “adequate,” however, guidance may be found in the new Fannie Mae/Freddie Mac condominium guidelines which mandate at least 10% of annual operating budget in reserves.
  • No more than 10% of the units may be owned by one investor.  This will apply to developers/builders that subsequently rent vacant and unsold units.  For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100% complete; and only one unit can be conveyed to non-owner occupants.
  • Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.

Buried in the fine print is a requirement for an affirmative action-type housing plan. For both new construction and conversions, if the developer intends to market 5 or more units within the next 12 months with FHA mortgage insurance, an Affirmative Fair Housing Marketing Plan (AFHMP) or a Voluntary Affirmative Marketing Agreement (VAMA) must be in place. An affirmative fair housing marketing plan requires that the racial, socioeconomic, and ethnic composition of the condominium residents closely mirror that of the neighboring area, to the greatest extent possible. Most new condominiums don’t have these in place.

Click here for the new FHA condominium guidelines. You can look to see whether a condominium is approved on the HUD Homes & Communities website located here. Here is the FHA Condominium Mortgage webpage.

The Impact: More Work For Lenders, Condominium Associations/Managers And Attorneys

I expect FHA lenders will approach condominium association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with FHA (and Fannie Mae) legal requirements. If a condominium is not on the FHA-approved list, or has lost its approval, condominium associations should consider applying for approval (or re-approval). Reportedly, FHA/HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Also keep in mind that the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions.

Our office is well equipped to assist lenders and buyers with FHA loan compliance issues as we have recently issued opinion letters and certifications under the similar Fannie Mae condominium regulations. Contact rvetstein@vetsteinlawgroup.com for more information.

{ 11 comments }

IMPORTANT UPDATE: 11/16/09:  FHA Issues Final Revised Condominium Lending Guidelines

As a follow up to my post on the new FHA condominium regulations, I received word from my friend Seth Wills at XLT Property Management, that the Community Associations Institute — the leading condominium and homeowner’s association trade group — recently sent a bulletin to its members, railing against the new FHA and Fannie Mae regulations as overly onerous and hurtful to the real estate market. CAI’s memo states:

CAI believes the new regulations would be a serious burden for condominium associations, and lead to market confusion that could hinder the housing and economic recovery. Under the proposed regulations, all condominiums previously approved for FHA financing would have to be reapproved or FHA financing would not be available. Also, instead of FHA staff reviewing and underwriting condominium projects, FHA would follow Fannie Mae and Freddie Mac by allowing lenders to review and underwrite these projects and certify compliance to FHA. This is the same system that resulted in the current mortgage default crisis. Furthermore, condominium boards (and management) would be asked to provide legal documents, contracts, plans, insurance coverage, pre-sale and owner occupancy percentages and other documentation to lenders performing the underwriting reviews. Condominium associations would also be required to compile, maintain and provide the necessary documentation and information requiring them to develop and implement new procedures — adding significantly to the workload of community managers and condominium boards.

CAI’s position is not surprising given the spat of recent, increased government intervention and regulation affecting condominium and HOA governance.  CAI makes a good point with respect to the agencies’ failure to coordinate their regulatory policies:

CAI believes it is essential that these agencies coordinate their actions. These agencies are all essential to mortgage financing and the housing market. Different requirements create confusion for lenders, borrowers, associations and the general public. Such confusion can only slow the recovery of the housing market and the economy in general.

The FHA regulations are set to go into effect November 2.  We’ll see if CAI’s promised lobbying push this next month has any effect.

{ 7 comments }

Real Time Analytics