This article offers a great summary of the new FHA lending rules for condos. It was printed on 20 June 2010, The Atlanta Journal – Constitution (Gary A. Poliakoff, Ryan Poliakoff).
New FHA lending rules for condos could stall the housing recovery: Restrictions open door to heavier weight being placed on owners. Commercial activity limits will add to crisis.
In February, the Federal Housing Administration passed a new set of lending guidelines that removes the long-standing “spot approval” process for FHA-insured condominium loans, and enacts stringent new requirements for projects to be approved on a propertywide basis.
While these new guidelines purport to make the loan approval process simpler, they will dramatically reduce the market for the glut of unsold and abandoned condominium units. And, while the new rules attempt to shield the FHA from the vagaries of the real estate crash, they are likely to have the opposite effect, restricting the overall U.S. recovery and preventing the FHA from building a stable inventory.
Before Feb. 1, 2010, condominium buyers looking for approval of an FHA-insured condominium loan were able to file paperwork for each unit individually, with a determination of suitability made on a per-unit basis. The new guidelines require preapproval of the entire building, ultimately removing the spot-approval process. The FHA has issued new rules that will determine whether a condominium project can be approved, and unless the property passes muster, FHA approved loans will not be available to buyers.
These regulations cast an extremely wide net. It is currently estimated that the FHA insures more than 20 percent of all loans. FHA-backed loans are attractive to buyers — they have lower down payment requirements and often better lending terms.
And in some areas of the country, especially in metropolitan and resort areas, condominiums account for a large percentage of the total home marketplace. It is believed that condominium speculation was a large contributing factor to the housing bubble and crash, and a huge backlog of units remains unsold (which continues to drag down the recovery).
In order to recover, our economy needs a correction in the supply and demand ratio for condominium properties. The federal government should therefore be easing lending requirements for the condominiums, which would allow well-qualified buyers and investors to clear the backlog and start the market flowing again.
Unfortunately, the authors of the new guidelines appear to be out of touch with the current realities in the marketplace, and especially the severity at which condominiums have been hit by the housing crisis, as some of the following new rules will be nearly impossible to achieve for the majority of condominiums.
1. Maintain a reserve equal to 10 percent of the annual budget.
Even completely healthy condominium properties often fail to maintain a reserve of this size, and in many states, condominium owners may chose to waive collection of reserves entirely. A truly distressed property, one that needs the government’s help, will never be able to budget for basic services (such as water and garbage) and still maintain appropriate reserves. Reserves are kept for emergencies — many communities have actually used their reserves to weather the current crisis.
2. Make sure that no more than 15 percent of owners are more than 30 days late on condominium fees.
Again, this is a guideline that seems ignorant of reality — in the current economic environment, even healthy properties can have delinquency rates over 15 percent, and the vast majority of distressed condominiums will never reach this threshold.
There are struggling-but-functional condominiums in the country today where over half of the units do not pay maintenance, but the solution to this problem is to get the abandoned units into the hands of new buyers—not to preclude the entire property from one of the country’s most popular loan programs. This single guideline realistically exempts every single property that the government desperately needs to assist.
3. Assure that no more than 10 percent of the units are held by a single investor.
Not only is this guideline misguided, but it conflicts with the current trend in state law, where states are actually making it easier for investors to buy large numbers of unsold units. Abandoned or empty, ownerless properties contribute nothing to a condominium, and force the other owners to foot the bill.
When investor-owners purchase large blocks of units in distressed condominiums, they have legal responsibilities to pay maintenance on those units and contribute to the upkeep of the property. That’s a good outcome for distressed communities — the FHA guideline, which would block this practice, is perplexing.
4. Have no more than 25 percent of the space used for commercial activity.
Many extremely successful condominiums, especially in large cities such as New York, are designed with large percentages of commercial space — the rents paid can reduce dramatically the maintenance load on owners. The commercial owners attract buyers to the condominium, particularly those who appreciate the convenience of having in-building amenities such as restaurants, shopping and entertainment. Again, this guideline appears to ignore marketplace realities and blocks help for distressed properties that could otherwise be quite successful.
There are other perfectly reasonable qualifications in the new FHA rules (allowing lenders to review association insurance policies and financials, requiring fidelity insurance, etc.), but the guidelines above may have significant unintended negative effects on the housing market, blocking the vast majority of distressed condominium units from federal assistance and leaving millions of owners to the whims of the marketplace.
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