Several months after the implementation of strict federal guidelines meant to limit Federal Housing Administration risk when writing condo loans, many smaller developments are still struggling to adjust, even as FHA condo loans continue to make up a huge part of the marketplace.
The FHA and Fannie Mae announced the new rules last year, but strong lobbying by industry organizations like the Community Associations Institute resulted in a delay of full implementation until February. But with the spring market just now getting into full swing, it’s only recently that some condo boards have woken up to the full impact of the new rules.
“There has been absolute forced compliance with both Fannie Mae and FHA, and that forced compliance really hasn’t trickled down enough to the homeowners or the [condo] boards,” said Orest Tomaselli, CEO of National Condo Advisors, a New York consulting firm. “The easiest way to find out is when [potential condo buyers] can’t get a mortgage, and that’s what’s happened throughout the industry.”
‘Not In My Best Interest’
FHA loans, which make up approximately 30 percent of the market, have been particularly difficult to obtain. Previously, developers could either seek FHA approval for individual units on a case-by-case basis, known as spot approval, or file to get the entire building pre-approved.
Under the new regulations, the entire building must be approved, either directly by the Department of Housing and Urban Development (HUD Review and Approval Process, or HRAP), or certified by the lender as meeting HUD’s standards (the Direct Endorsement Lender Review and Approval Process, or DELRAP) before potential buyers in the building are eligible for an FHA loan.
But getting those approvals has proven difficult.
“You’d be hard pressed to find a DELRAP project approval. Literally, there’s got to be nothing wrong with the project…..A lender has to sign a certification, if they do a DELRAP project approval, that if there’s any misrepresentation on the form, they could face a million-dollar fine and 30-year jail term,” said Tomaselli. “[If I’m a lender,] it’s not really in my best interest to sign that piece of paper, no matter what kind of due diligence I do.”
A local sampling of condos that have obtained pre-approval illustrates just how few approvals have been granted. According to HUD’s database, in Cambridge, only 16 condos currently have approvals under the new rules – and half of them had previously been approved by HUD. In Somerville, only 11 condos have approvals. In Malden, 10.
Problems, And More Problems
The rule changes were aimed at limiting the risk of loss to the FHA – and that meant taking a gimlet-eyed look not only at the individual units in a building, but also at the building and building management itself, to ensure that if a unit is foreclosed on it will retain value and could be resold.
But requirements such as making sure at least 50 percent of units in new developments are pre-sold and used as primary residences have proven to be difficult hurdles to overcome in the current environment.
“There’s so many conversions in the Boston area, 2-, 3-, 6-unit buildings that they’re trying to sell, but the problem is if they’re not 50 percent sold or under contract, there’s nobody willing to put mortgages on them,” said Jaclynn Sulfaro, president of the Massachusetts Mortgage Association.
A recent seminar Tomaselli gave at the New England Condo Expo in Boston was packed with anxious condo board members and owners trying to figure out how to make their buildings eligible for potential government-backed mortgages under the new guidelines.
Particular stumbling blocks include requirements like having condo associations set aside 10 percent of their yearly budget to form the basis of an emergency repair fund.
The problems can feed into each other; in buildings which have had a number of distressed units, association budgets are likely to be hard hit as well.
“The problem is, [condo units] were the first to go in a lot of the foreclosures. Most of them were bought up by investors, short money,” said Sulfaro. “People – the first thing they don’t pay is their condo fee, the second thing they don’t pay is their actual mortgage itself…So then [the association’s] got no money set aside for repairs.”
