FHA Condo Announcement Brings Good News and Bad
Although “site condo” builders and their home buyers received some good news in FHA Mortgagee Letter 2009-19 released on June 12, other aspects of the announcement have raised concerns. Chief among them is a 30% limit on the number of units in new FHA-approved condo projects that can be financed using FHA-insured mortgage loans. NAHB is working with the agency to change this provision before it is implemented on Oct. 1.
A similar requirement has been in place for years for units in non-approved buildings, but applying the 30% limit to FHA-approved projects would have an extremely negative impact on the condominium market.
On the positive side, the letter immediately eliminated the requirement for developers to seek approval for projects that are being developed as “site condos.” It has been common practice for years in Michigan, and to a lesser degree elsewhere, to develop single-family subdivisions as site condominiums.
In the past, developers often did not seek the FHA’s approval for these projects, primarily for technical reasons, and the lack of FHA approval did not become an issue until turmoil in the mortgage markets in 2007 made it more difficult for home buyers to obtain conventional financing.
Changes in the housing laws in 2008 opened the door for the FHA to treat site condo developments the same as other single-family developments, which have not required FHA approval for many years. NAHB had been pressing the FHA to make this change since the site condo issue began to surface early last year.
The mortgagee letter makes a number of other changes, many of which will be positive for condo developers. For example, beginning on Oct. 1, a building permit and certificate of occupancy from a jurisdiction that performs at least three construction inspections will eliminate the need for the condo units to be covered by a 10-year warranty. For other jurisdictions, the warranty requirements will be waived if a lender issues an “early start” letter and the property has been inspected by an FHA-approved inspector.
FHA’s announcement also confirmed that 50% of the units must be owner-occupied and that 50% of the units in a project or in a phase of a project must be sold before loans can be closed. While this hurdle may present challenges in many of today’s markets, it is easier to comply with than Fannie Mae’s and Freddie Mac’s presale requirements, which can be as high as 70%.
Another significant policy shift is an option that grants project approval authority to approved lenders who warrant that the project conforms to FHA’s requirements. Some industry experts have expressed concern that subsequent lenders who are considering making loans to individuals to purchase units in a previously lender-approved project would have to either rely on the approving lender’s representations or persuade the approving lender to share the project review file.
For more information, e-mail Bill Renner at NAHB, or call him at 800-368-5242 x8597.