New Condo Rules for FHA

* From RealtyTrac.com
In rules just posted, the FHA says that starting October 1st. Here are some of the highlights everyone needs to know:
•Changes effective for all FHA Case Numbers assigned on or after 10/1/2009. The spirit behind these changes is to complete a current due diligence of all condo projects.
•Spot approvals are being eliminated. This means, to obtain FHA Financing for a condominium, the project must be FHA-Approved.
•All current condominium project approvals will be invalid (with the exception of projects approved on or after October 1, 2008) and will be required to go through the re-approval process. There will be 2 approval process options:
1)HUD Review and Approval Process (HRAP)
2)Direct Endorsement Lender Review and Approval Process(DELRAP) This option is available only to lenders who have unconditional Direct Endorsement authority and staff experience in reviewing and approving projects.

HUD will only accept approval packages from review from:
1) FHA Lenders, or
2) Builders/Developers
•Going forward, all projects will require re-certification every two years.
• FHA will limit their exposure per project to 30%.
• New construction (or less than <1 year old) will no longer require a 10-year warranty. Condos will follow the same guidelines as SFR, which requires a one-year builder’s warranty, copy of the building permit and certificate of occupancy. Project approval is not required for:
1)FHA-to-FHA streamlines refinances
2)FHA/HUD Real Estate owned (REO) division sales.
Getting projects back on the approved list is anticipated, initially, to be a long process. And until a project is approved, FHA financing is not an option. Those who have condos for sale right now, may choose to aggressively market their property for a worry-free sale and closing before October 1st.
Condos must meet several new standards:
• All projects not deemed to be used primarily as residential real estate are out.
• Because of noise worries, FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield. The FHA says that lenders “must avoid or mitigate” such conditions before completing their loan review process, but how does one avoid or mitigate an air force base? How much mitigation is enough mitigation? The obvious result is that with an abundance of caution lenders will be unable to finance properties with potential noise hazards.
• There will be no more FHA loans if the “property has an unobstructed view, or is located within 2,000 feet, of any facility handling or storing explosive or fire-prone materials.”
• Also, FHA loans are out if the property is located within 3,000 feet of a dump, landfill, or super-fund site.
• Not more than 25 percent of the property’s total floor area can be used for commercial purposes.
• No more than 10 percent 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 percent complete; and only one unit can be conveyed to non-owner occupants.
• No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
• At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
• At least 50 percent 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 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
• Projects in designated wetland and flood zones will not qualify for FHA insurance.

If you look at the new FHA rules above you will instantly notice several problems.
First, a lot of existing condo projects are easily within 1,000 feet of a “heavily traveled road.” That’s why they were built in major metro areas and while the financing rules have changed the condo units cannot be moved.
Second, huge numbers of properties — especially in California, Florida and Las Vegas — will never pass muster under the new ownership standards or the arrears guidelines. This is a significant problem given that FHA-insured loans now represent about one-quarter of all mortgage financing.
Third, condo loans under the FHA rules will be dependent on the use of land NOT controlled by condo owners. For instance, if someone builds a gas station two blocks away is that an example of a “facility” which handles or stores explosive or fire-prone materials? Why is it so terrible to have a property near a golf course that was built on top of a reclaimed landfill?
Fourth, the cost of private-sector condo financing without FHA insurance will increase because borrowers will have fewer options.
“From the perspective of a mortgage insurer the new FHA rules make a lot of sense,” says James J. Saccacio, chief executive officer of RealtyTrac.com, the leading online marketplace for foreclosure properties. “However, in many cases these new standards will apply retroactively. Projects built long-ago and units bought when the rules were different will be impacted. Many of the states which now have the worst foreclosure problems will be hurt because less condo financing will be available. In general, the FHA needs to re-think its standards, especially those which are beyond the control of unit owners.”