Market News

FHA Changes Rules On Condo Financing

In a move designed to shift risk from the US Department of Housing and Urban Development (HUD) to lenders, the Federal Housing Administration (FHA) is changing the way condominiums are financed. FHA has issued new guidelines for lenders underwriting loans secured by any unit located in a condominium project. Effective October 1st, lenders will be required to review project documentation and determine if the project meets eligibility requirements. (See HUD Mortgage Letter 2009-19 for more details.) Previously, HUD maintained a list of approved condo projects, which streamlined the underwriting process for lenders. However, the struggling condo market led HUD to suspend the use of an approved project list, thereby forcing lenders to perform due diligence on each condo project that is presented for approval. Preliminary response from lenders has been guarded. The mortgage industry has transformed into a risk-averse operation, with lenders abandoning potentially hazardous loans in favor of safe, high-performing products that can be sold to Fannie Mae, Freddie Mac, or FHA. Erroneously approving a condo project can expose a lender to significant financial penalties. As a result, lenders are opting to manage this risk by electing not to accept FHA loan applications for condominiums. As the October 1st deadline approaches, expect to see a flurry of announcements by lenders as to their position on this matter. FHA financing has long been the loan of choice for many first-time home buyers due to its relaxed underwriting guidelines (compared to those of Fannie Mae or Freddie Mac, the two main sources for conventional financing). Since much of the current home sale activity is attributed to the first-time home buyer, this announcement by HUD comes at a precarious time as the housing sector struggles to recover. However, HUD must take steps to mitigate their growing losses, and curbing the risks associated with condo financing is a start.