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FHA Delays New Condo Rules

The Federal Housing Administration is delaying implementation of new rules for condo approvals until Dec. 7 and will reportedly pull back from some changes that critics said would have delayed or derailed many condominium sales.

In a June 12 letter to lenders, the Department of Housing and Urban Development announced FHA would implement a new approval process for condominium projects on Oct. 1.

As originally proposed, FHA would have been limited to guaranteeing loans on no more than 30 percent of units in any one condo project, instead of the 50 percent currently allowed.

HUD also said only condos in FHA-approved projects would be eligible for the government’s mortgage insurance program, eliminating a “spot loan” approval option that’s been in place since 1996 for approving individual loans in buildings that haven’t been certified yet.

Even more problematic for lenders, HUD said all condo projects — including 40,000 developments already on the FHA approved list — would have to be re-certified every two years, meaning many projects eligible for FHA loans today would need to be reviewed before any more FHA loans could be approved in those buildings.

Lenders with direct endorsement authority from FHA would still have had the authority to certify condo projects as in compliance with FHA requirements themselves, but would risk losing their ability continue making FHA loans if too many loans in those projects went bad.

All condo projects, whether approved by FHA or direct endorsement lenders, would have had to meet minimum standards including a requirement that no more than 15 percent of units be behind on their association dues.

Lending and real estate industry groups complained about the sweeping nature of the changes. Three weeks before they were to take effect, FHA announced it was delaying implementation until Nov. 2.

Now, reporting on a meeting with FHA senior managers last week, the Mortgage Bankers Association says housing officials plan to revise some aspects of the FHA condo approval policy and push back implementation until next month.

According to the MBA, condominium projects currently on the FHA approved list will not be required to undergo recertification.

FHA will continue to back as many as half of all loans in a condo project, and up to 100 percent of units in “well established” projects with a minimum of 10 percent reserves. Half of the units in a project will still have to be sold to owner-occupants before it FHA will back any loans in a building, however.

“If what the MBA says is the deal, it’s essentially a non-event,” said Faramarz Moeen-Ziai, a mortgage banker at San Ramon, Calif.-based Bank of Commerce Mortgage.  “The big deal for us wasn’t the guideline changes — guideline changes happen all the time. It was wiping the slate clean on all previously approved condo projects” and requiring re-certification.”

FHA’s desire to get rid of the spot loan approval process was understandable — “that’s just a hassle” for the government loan insurance program to approve loans on a case-by-case basis, Moeen-Ziai said. “But throwing out all the past approvals wholesale was, I think, a move that was a lot more complicated than they’d originally anticipated.”

Although Bank of Commerce Mortgage is a direct endorsement FHA lender that relies on condo sales for 15 to 20 percent of originations, Moeen-Ziai said there was an internal debate within the company whether it wanted to take on the additional risk of certifying condo projects itself.

“By allowing the direct endorsement community to qualify these condos, they (were) basically putting the risk off to us,” he said. “Nobody wants to take on risk right now.”

The pullbacks that MBA says FHA has committed to make in the condo approval process are great news, Moeen-Ziai said — “a stay of execution for the condo market.”

A HUD spokesman confirmed that FHA has pushed back implementation of new condo approval rules to Dec. 7, but did not comment on a list of changes the MBA says FHA has committed to making.