Are new lending rules going to destroy condo values?

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Effective October 1, 2009, FHA is implementing new condo guidelines that could devastate the values in condo developments. FHA is one of the primary sources of financing for condo developments, especially those with a large number of units that are priced within FHA loan limits. Because many of the homeowners in condo developments had zero to very low down payments, the foreclosure rate has increased, causing huge losses to FHA. When insurers, such as FHA experience huge losses, they write new regulations to limit those losses in the future.

The new lending guidelines are going to be so tough, fewer developments will qualify for FHA financing, which will significantly limit the buyer pool.

Until now, almost any condo development could apply to FHA for “approved” status, therefore making FHA financing available in that development. In addition, in developments that were not approved, “spot approvals” were sometimes available for individual units.  (The lender applied for an approval for the unit you wanted to buy, in spite of the development not being approved).

Following are the new guidelines: (This is not pretty, so prepare yourself)
1. There will be NO more spot approvals.
2. All development not considered primarily residential are out.
For instance, a development with more than 25% of the total floor area dedicated to commercial business use is out.
3. Noise issues is a new concern, so any development within 1,000 feet of a highway, freeway, or heavily travelled road, 3,000 feet of a railroad, 1 mile of an airport, or 5 miles of a military airfield will become ineligible for approval.
4. If the property has an “unobstructed view , or is located within 2000 feet of any facility handling or storing explosive or fire prone materials, it is not insurable - we're not talking just fireworks factories here.  A gas station 2 blocks away can disqualify this development.
5. Any property located within 3000 feet of a dump, landfill, or superfund site, is ineligible.
6. No more than 10% of the properties can be owned by a single investor, including builders or developers who are renting out or have not yet sold vacant units. For 2-3 unit developments, no one can own more than one unit.
7. No more than 15% of the homeowners can be more than 30 days late on their homeowner dues.
8. For new developments, at least 50% of the units must be sold prior to applying for FHA approval (valid presales include those with purchase agreement and lender validation of an approved loan in process)
9. A minimum of 50% of the units must be owner occupied or sold to owners who intend to occupy as their principal residence.
10. Projects in designated wetland and flood zones will not qualify.
11. All current condominium project approvals will be invalid (with the exception of projects approved on or after October 1, 2008) and projects must be re-approved under the new options available. Going forward, all projects will require recertification every two years.

Here’s why these changes will likely hurt condo values:
1. Obtaining the approval from FHA is a very time intensive and expensive process. Many condo developments are not currently approved because of the time and expense. Imagine how many fewer projects will be approved if the homeowner association has to re-apply every two years, beginning this October.
2. Many condo projects are very close to major transportation, deliberately. Condo owners are often looking for ease of transport, and that is often a factor in choosing a development.
3. Many existing developments will be excluded from insurability simply because of the arrearage rule, due to the current economy.
4. What happens to a development that was built in a great location, but a gas station is now just a couple blocks away (flammable materials?) Condo owners cannot control what businesses are approved once the development is already there.
5. A decrease in the buyer pool will hurt re-sales. Conforming loans require better credit, and larger down payments.

What can you do if you are a condo owner?

The first thing I would do is call a meeting of the homeowners association and try to figure out if your development will qualify for FHA financing based on the above new rules. If it will, I would definitely be taking steps to get your development FHA insured (unless it was certified after October 1, 2008).

If your development was FHA approved, and no longer will be, I would be contacting the FHA, your congressional representatives, etc. I think you need to get pro-active to keep these new rules from being implemented as they are.

If you are a home buyer, and thinking about buying a condo, should you wait to see what happens? I can’t advise you to do that, but it is probably time to do some soul searching before you make that investment.

There is always a chance that some of these rules will change prior to October 1, 2009, especially if the outcry from the public, and those directly affected, are loud enough.  Outcry is the only tool we have available to us right now, so make your voices heard.

Your comments, of course, are always welcome. 

Shelby