FHA condominium guidelines

New FHA Condominium Guidelines: Financially Sound Projects = Better Investments

by Rich Vetstein on December 9, 2009

in Condominium Law, FHA, Massachusetts Real Estate Law, Mortgages, Realtors

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 }

FHA Condominium Lending Rules Go Into Effect Today: Today’s Hurt Is Tomorrow’s Gain

by Rich Vetstein on December 7, 2009

in Condominium Law, FHA, Massachusetts Real Estate Law

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 }

FHA To Ease New Condominium Guidelines–Spot Loan Approval Extended Until Feb. 1

by Rich Vetstein on November 10, 2009

in Condominium Law, FHA, Massachusetts Real Estate Law, Mortgages

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 }

New FHA Condominium Regulations Delayed (Again) to December 7, 2009

by Rich Vetstein on October 26, 2009

in Massachusetts Real Estate Law

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

The FHA has announced that it will again delay the implementation of the new regulations governing condominium mortgages until December 7th, 2009. The new regulations were initially proposed in June and would change the approval process and the criteria used to determine if a buyer can obtain a FHA mortgage on a condominium. The proposal would replace the current spot approval process with a new comprehensive approval process under which approvals would be good for two years.

On October 21st, FHA stated in an email:

Implementation of FHA’s new policy guidance for condominium project approval and condo unit financing will be delayed until December 7th 2009.  The new guidance, to be issued within the next two weeks, will:  1) offer additional leniencies to address the difficult market conditions and 2) augment some portions of FHA Mortgagee Letter 2009-19, providing additional information and clarification.

Until the new guidance takes effect on December 7th, 2009 lenders may continue to use the Spot Loan Approval guidance issued in Mortgagee Letter 1996-41.  Further, the site condo and manufactured housing condo project changes that have already been implemented are not affected by this delay.

See my prior post for a comprehensive review of the changes.

There has been a frenzied lobbying effort by condominium groups led by the Community Associations Institute and lenders to suggest ways to improve the proposed regulations in a manner that would both mitigate FHA exposure to bad mortgage debt and set realistic benchmarks for condominium associations to qualify for project approval under FHA financing mechanisms. The FHA’s delay may be attributed to sorting through all the concerns about the new, stricter guidelines.

{ 1 comment }

New Stricter FHA Condominium Lending Regulations and Guidelines Sure To Slow Financing And Chill Sales

by Rich Vetstein on October 6, 2009

in Condominium Law, Fannie Mae, FHA, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

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 [email protected] for more information.

{ 11 comments }

Community Associations Institute Weighs In Against New FHA and Fannie Mae Condominium Regulations

by Rich Vetstein on October 5, 2009

in Condominium Law, Fannie Mae, FHA, Mortgages

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 }