FHA ready to adjust rules for condos
WASHINGTON — Thousands of condo unit owners and buyers around the country could soon be in line for some welcome news on mortgage financing: Though officials are mum on specifics, the Federal Housing Administration is readying changes to its controversial condominium rules that have rendered large numbers of units ineligible for low-down-payment insured mortgages.
The revisions could remove at least some of the obstacles that have dissuaded condominium homeowner association boards from seeking FHA approvals or recertifications of their buildings for FHA loans during the past 18 months. Under the agency's regulations, individual condo units in a building cannot be sold to buyers using FHA insured mortgages unless the property as a whole has been approved for financing.
Moe Veissi, president of the National Association of Realtors and a broker in Miami, says FHA's strict rules "have had an enormous impact on individuals" across the country, especially residents of condo projects who suddenly find they are unable to sell their units because their condo board has not sought or obtained approval from FHA as the result of objections to the agency's strict criteria. This, in turn, depresses the prices unit owners can obtain and ultimately, said Veissi, harms their equity holdings and financial futures.
FHA officials defend their requirements as prudent and necessary to avoid insurance fund losses, but have expressed a willingness to reconsider some of the issues that have upset condo owners and the real estate industry. Among the biggest areas of criticism of FHA's rules are its limitations on:
Nonowner occupancy. The agency requires that no more than 50 percent of the units in a project or building be nonowner-occupied. This rule alone has made large numbers of condominiums in hard-hit markets ineligible for FHA financing, where investors have purchased units for cash to turn into rentals.
Delinquent condo association fee payments. FHA refuses to approve a project where more than 15 percent of the units are 30 days or more behind on payments. Given the state of the economy, this has been a problem for thousands of associations, even in relatively prosperous markets.
Nonresidential space usage. FHA has set a cap of 25 percent of the total floor space in a project for commercial use. Critics say this is too low and unrealistic for condo projects in urban areas, where retail and office revenues can be important to overall financial feasibility.
The agency has imposed a long list of other requirements on insurance and reserves, plus a highly controversial rule that associations interpret as creating severe legal liabilities for condo board officers if applications for FHA approvals contain inaccuracies.