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(From CU Journal) – The Department of Housing and Urban Development will remove some barriers to government-insured condominium lending next month, including a post-crisis measure housing industry groups have long complained about.
“I know a lot of people have been asking, ‘When is the condo rule coming?’ Well, the wait is over,” said HUD Secretary Ben Carson in a press call on August 14.
Most prominent within the final rule’s changes is the reinstatement of “spot loan” approvals. A spot loan occurs when the FHA insures a mortgage for a condo unit purchase in a project that does not have the agency’s approval.
Under the Obama administration, the FHA disallowed spot loans and generally tightened condo underwriting in response to elevated levels of distressed mortgage performance during the financial crisis.
Starting October 15, the Federal Housing Administration will conditionally insure some loans on buildings that don’t otherwise meet the guidelines necessary for approval.
Only 6.5% of the more than 150,000 condo projects in the United States have received FHA approvals, so making it possible to finance units in unapproved projects could open the door to more lending.
Although loan performance is much stronger in the current market, the FHA remains mindful of the concerns that arose during the Great Recession and has limited the degree to which it has loosened underwriting as a result.
“We wanted to avoid some of the pitfalls of the housing crisis,” said FHA Commissioner Brian Montgomery. “This is a message we heard loud and clear.”
For unapproved condominium projects with 10 or more units, for example, no more than 10% of individual condo units can be FHA insured. For smaller condominium projects, no more than two units can be FHA insured.
And while the changes coming in October will include some flexibility to selectively allow units in buildings with owner-occupancy rates as low as 30% to be financed, 50% remains the minimum for most projects. In addition, FHA could set a requirement as high as 75% in some instances.
The FHA also could revisit its decision to loosen condo underwriting if adverse market conditions were to re-emerge in the future.
Under current market conditions, more flexible condo underwriting could help address the shortage of affordable housing inventory relative to demand.
HUD officials said the increased access to the condo market could boost first-time homebuyer activity as well as minority home ownership rates that are relatively low compared to white home ownership rates. A growing percentage of first-time homebuyers are minorities.
More access to condo financing also could help seniors seeking affordable housing. The more flexible underwriting for condos is in effect for consumers applying for Home Equity Conversion Mortgages as well as for standard FHA loans. HECMs are available to borrowers age 62 and up.