News that the Federal Housing Administration (FHA) is changing its approval process for condominium projects was met with mixed reaction throughout the housing industry.
In a letter that went out Nov. 6, the FHA produced new guidelines to constrict financing for condos. Project approvals will expire two years after the project receives approval and returning to the program requires reapplication. Projects that were approved before Oct. 1, 2008 must be recertified by Dec. 7, 2010.
Additionally, projects certified after Dec. 7 must have no more than ten units owned by a single investor (which also applies to developers or lenders that rent out unsold inventory); no more than 15 percent of the total units more than 30 days past due on their condominium association fees; no fewer than 50 percent of units can be owner-occupied; and no fewer than 50 percent of units can be sold.
Starting Dec. 7, the FHA will also temporarily ease condo lending guidelines to help fuel development, providing a reprieve on the 50 percent sold requirement and allowing certification for development with 30 percent sold. That’s welcome news to some. “For anything new, 30 percent is critical. Fifty percent presupposes you pre-sale the building. That number doesn’t work today," says Chris Ballard, founder of McWilliams Ballard, an Alexandria, Va.-based real estate sales firm.
The reprieve may work in Washington D.C., but in harder hit markets, reducing the limits is more akin to putting a Band-Aid on a gunshot wound. “Even with FHA's new rules, financing is still a challenge,” says Peter Zalewski, CEO of Bal Harbour, Fla.-based Condo Vultures Realty.
In fact, Jack McCabe, president of Deerfield Beach, Fla.-based McCabe Research & Consulting, thinks the requirements limiting the number of investor-owned units, the number of units with condo fees past due, and the number of investor-owned occupied units squash any chance of generating sales momentum in markets such as Florida and Las Vegas where these three situations are commonplace.
“In Florida and some of the other bubble markets, even though it looks like they’re loosening some of the requirements, it’s still not that great,” McCabe says. “You can change one thing [ie. the number of pre-sales], but the others will still come back and bite you.”
But McCabe understands why the requirements exist. “They want to stimulate sales, but they don’t want to make sales that end up in foreclosures,” McCabe says. “While FHA is well-meaning, this won’t help in some of the markets in dire situations. But I think it will definitely stimulate sales in some of the more stable markets.”