My ambition this week was to discuss the variety of models of possible ownership of an interest in a co-housing project that did not entail the added expense of purchasing the land. One such ownership model is the condominium form. But the FHA is messing with the heads of condo developers who now are having some challenges in obtaining financing for their projects. The new regulations were supposed to go into effect on December 7, 2009, but now have been pushed back to implementation in February, 2010. These regulations may have profound ramifications for developers, condo associations, buyers and sellers.
Some of the highlights of these proposed changes are:
1. Any condo development approved prior to Oct. 1, 2008, loses its FHA approval and must formally reapply for approval for FHA endorsed mortgage financing.
2. No “on the spot” approvals for an end loan are available at the condo development site. All applications must go directly to FHA for processing. Instead, a new system of project-wide approval by FHA Authorized Direct Endorsement Lenders will be implemented.
3. Existing condos, regardless of whether FHA-approved prior to Oct. 1, 2008 or not, must reapply for Department of Housing and Urban Development approval. This means that if a seller wants to sell his condo unit, even if he received a FHA loan in 2006, and he is a new borrower, he won’t be able to get a FHA loan for his unit unless his condo has been re-approved by HUD.
4. The rule that only as much as 30 percent of a building’s units can be owned by FHA-backed mortgagors is increased to 50 percent of units, but only until December 31, 2010. Some already-completed buildings can qualify to be 100 percent FHA-backed; but the applicable regulations seem pretty stringent, constricting the universe of readily-qualifying projects.
5. For new-construction pre-sales today, only 30 percent of a building has to be sold conventionally (without FHA-insured loans) before a buyer can get an FHA-endorsed mortgage. The threshold will rise to 50 percent via conventional sales at the end of December, 2010. When a developer builds a new condo project after that, the FHA won’t insure a loan until at least half of the units have been sold to uninsured mortgage borrowers. That threatens a closed-loop dilemma for some projects: People can’t buy with FHA-insured loans because, well, other people couldn’t buy with FHA-insured loans. The FHA instituted this requirement, we’re told, to reduce its exposure to potential losses and to fight fraud. Taxpayers should be comforted by this last thought, except those sporting only 3.5% of the purchase price in cash.
February seems only a short time away; let’s see if HUD/FHA holds the line on these regulations through the proposed current implementation date.