By: Clifford A. Hockley
We all know that condominium developers built more condominiums than the market could absorb from 2006 – 2009. They built from scratch, developing small and large projects from duplexes to hundreds of units, and they bought apartments, renovated and replatted them so they could be sold as condominiums. While the going was good, they sold thousands of them. Then the economy hiccupped and the developers, investors and their bankers were stuck with a huge inventory which they need to unload.
This is where our story starts.
Due to the high number of condominiums in the marketplace and the low interest rates, this should be a great time to buy a condominium. But this year Fannie Mae, Freddie Mac and FHA have decided to tighten up their standards and reduce their risk and exposure to the condo market. Fannie Mae and Freddie Mac are typically the organizations that supply a secondary market to banks. Banks lend to you and then they turn around and sell their loans to one of these markets. They typically look for 25% down payments if you want to buy a condominium.
A FHA loan is a federal assistance mortgage loan insured by the Federal Housing Administration (FHA). The loan may be issued by federally qualified lenders. FHA does not make loans. Rather, it insures loans made by private lenders. Each lender sets its own rates and terms. FHA allows first time homebuyers to put down as little as 3% and receive up to 6% towards closing costs. On the 2nd of November 2009, FHA’s new rules for condominium financing will come into play. FHA has passed rules that make is very difficult for properties to qualify for financing and become FHA approved. We have summarized the new rules below.
The New Rules
1. Due to noise concerns, FHA insurance will be unavailable for properties that are within:
- 1000 feet from a highway, freeway or heavily traveled road
- 3000 feet from a railroad
- one mile from an airport
- five miles from a military airport
2. FHA financing will not be available to properties located within 2,000 feet of any facility handling or storing explosive or fire prone materials – like a:
- Gas station,
- Fire cracker sales or manufacturing operation
- Facility that stores or uses flammable or explosive chemicals.
3. FHA loans are not available if a property is located within 300 feet of a:
- Superfund site ( like the Willamette River in Portland, Oregon)
4. Projects in designated wetlands and flood zones will not qualify
5. Not more than 25% of the property’s total floor area can be used for commercial purposes
6. No more than 10% of the units can be owned by one investor
7. No more than 15% of the total units can be more than 30 days past due on their association fees.
8. For newly constructed units, at least 50% of the total units must be sold prior to any endorsement of any mortgage.
9. Fifty percent of the units must be sold to owners who will be occupying their units .
10. Properties listed on the National Register of Historic Places will have a hard time getting financing.
13. Projects consisting of four or more units will not be allowed to have more than 30 percent of the total units encumbered with FHA insurance .
14. A current reserve study must be performed to assure that adequate funds are available for funding of capital expenses and maintenance. A reserve study can be no more than 12 months old.
15. These rules also include the requirement for an affirmative action- type housing plan, for new construction and conversions over 5 units. This plan requires that the racial, socioeconomic and ethnic composition of the condominium residents closely mirror that of the neighboring areas.
Impact Buyers: As long as you have cash, or 20% down these rules will probably not affect you. On the other hand, if you are a buyer with a very low down payment this will shrink considerably the number of properties that will be available for you to purchase.
Condominium Owners: As a condominium owner that wants to sell, you will be faced with a shrinking pool of buyers. And if your property is located on a major road artery or in a downtown area, close to a river or a lake, you might as well kiss this form of financing goodbye.
Condominium Associations: Boards of Directors will be faced with the task of meeting these requirements if they can, to preserve their position with FHA (as an FHA approved property) and get financing in place for at least 30% of their owners. If Owners cannot sell their, properties that leave the potential that they might let them be foreclosed. If that happens then Assessment collections will be reduced, this could have a disastrous effect on associations.
Who will benefit? Historically, condominiums have been the springboard to homeownership. The new FHA rules will make it more difficult for first time homebuyers and may further slow the pace of condo development and absorption. Historic, Waterfront, and Downtown condominium communities will be the most challenged by the new FHA rules due to location. Conversely, the sagging suburban markets may struggle due to the higher delinquency rates.
In the short run apartment owners and banks will benefit as entry level buyers will only be able to buy foreclosed homes or continue to rent. It is not until the real estate market stabilizes and home prices start to increase, we can expect FHA to relax its rules. In the mean time condominium developers will have to work very hard to find alternative financing. In some cases the developers will agree to short term contracts, where they carry the paper.
But again, cash will be king and low income buyers will be priced out of the market. Summary The ability to purchase a condominium with a down payment of less than 20% is evaporating quickly. There may be a time where no one can benefit, the buyer cannot find financing, the seller can’t sell, the banks don’t want a flood of condominiums that they will have to manage, and Association Boards are scrambling to maintain the commons with dwindling budgets. Once this occurs political pressures will pressure the agency to adjust their policies. The question is: Can condominium owners wait that long ?
*Implementation delayed till December 7, 2009
Published: November 26, 2009