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FHA Condo Rules Pushed Back

by Peter G. Miller
October 28th, 2009

The FHA has pushed back tough new condo financing rules to December 7th. The rules were originally supposed to start October 1st.

In a note to lenders, HUD says the new rules will “offer additional leniencies to address the difficult market conditions.”

Translation: The new rules — which were intended to reduce FHA risk — went too far.

In June, HUD announced new FHA mortgage rules for condo financing that would have made FHA-backed loans tougher to get. Among the new standards, HUD was going to require that:

___ At least half the units had to be owner-occupied.

___ Eight-five percent of all units had to be current on their condo fees.

___ No more than 30 percent of all units could be financed with FHA mortgages.

Conflicts

At this writing we don’t know what “additional leniencies” HUD will offer, but there’s a practical conflict here that will be hard to resolve.

HUD cannot make the program too lenient because it then increases the risk of losses. Given that FHA reserves have been falling for the past few years, more risk is the last thing HUD wants.

But, RealtyTrac.com reports that six states make up 62 percent of all foreclosure activity nationwide. Those states are California, Florida, Arizona, Nevada, Illinois and Michigan. The first four states are major condo centers, the very markets where tougher condo rules will only add to local real estate woes.

So what can HUD do that would reduce unsold condo inventories while not increasing risk to the FHA program?

Investors

One idea is to re-think the general FHA ban on investors. You can finance property with two-to-four units with FHA financing as long as you live in one unit, but you can’t be a pure investor and get an FHA loan. In other words, you can’t just buy a house or a condo unit with FHA funding and just rent it out.

Why it makes sense to allow resident investors but not pure investors has never been clear. What is clear is that the program should be changed.

If the FHA program was opened to condo investors it could be done in a cautious manner. For instance, how about investor financing with 10 percent down? Or, what about “blanket” financing for investors, one loan secured by several properties — including the investor’s prime residence? You can bet that not too many investors would want a foreclosure when their own property would be at risk.

Meanwhile, if you’re considering the purchase of a condo it might be wise to buy and close before December 7th. You can bet that the replacement rules will not be as tough as the rules which were supposed to start October 1st — but it seems likely that the new standards will be tougher than the benchmarks for condo buyers which are now in place.

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