Last week, the Federal Housing Administration (FHA) gave the condominium sector a harsh smack in the face. Okay, that might be a wee exaggeration. But the new lending standards that the FHA has placed on condos, coupled with pre-existing standards implemented earlier this year by Fannie Mae and Freddie Mac, cannot be considered therapeutic for the sector's recovery.
Among the new FHA standards is the requirement that at least 30% of units in new condominium developments be pre-sold before the FHA will insure any mortgages for would-be condo owners. That percentage rises to 50% in 2011.
Furthermore, FHA will not approve loans in developments where the condo association has not deposited at least 10% of its annual budget in a reserve account for maintenance and repairs. Nor will it approve loans for developments where more than 15% of the condo units are more than a month late in their assessments. And the FHA won't insure loans where more than 10% of the development's units are owned by a single investor.
The FHA standards are latest insult to Washington-induced injuries aimed at the condo sector. In April, the government-sponsored enterprises (GSEs) implemented a new requirement in which condominium applicants who cannot come up with a 25% down payment are charged a three-quarter point add-on penalty. It doesn't matter if the applicant's credit is flawless – Fannie Mae and Freddie Mac have insisted it makes sense to charge those higher fees in order to counter the higher risks and losses that have laced their way through the condo sector.
As you can imagine, mortgage bankers in states with large condo markets are not happy with the federal government's actions.
‘It becomes a little more difficult to get financing based on the tightened Fannie and Freddie guidelines,’ says Howard Nelson, president of the Mortgage Bankers Association of Florida, in a recent interview with Secondary Marketing Executive. ‘That adds to the difficulty in our current economic environment.’
But the tougher standards aimed at the condo sector are not being shared by the single-family housing sector. With the glut of inventory on the market, condos will be at significant disadvantage, since the FHA, Fannie Mae and Freddie Mac requirements favor single-family housing. And for markets with weak economies and a surplus of unsold condos, this becomes a lose-lose situation.
The FHA's actions may have less to do with the condo sector than with its own state of affairs – the agency has been receiving too much attention for its increasingly fragile financial health. The agency's financial cushion has already fallen below the federally mandated minimum, and the Associated Press is reporting that approximately 18% olf insured loans are either delinquent or in foreclosure.
The Associated Press also carried a curious statement from Joanne Kuczma, director of the FHA's home mortgage insurance division, on why the condo sector is getting such a rough treatment. ‘We believe that we have a balanced policy that is flexible,’ she explains. ‘[And] will help us manage and mitigate the risk.’
Oh? The condo sector did not create the internal risks that the FHA needs to manage and mitigate – apparently, eradicating risks is not an FHA strategy. And few people will agree that a balanced policy involves putting one sector at an acute disadvantage so another sector can prosper.
The industry's trade groups – who have been more than a little busy this year in their lobbying efforts – are going to need to hit Washington again to challenge this blatant assault on the condo sector. Trade associations serving the states with large condo markets need to make their voices heard, too, and mortgage bankers who originate home loans for potential condo buyers have to join in the protest.
The FHA, Fannie Mae and Freddie Mac are not helping to revive the housing market by punching the condo market with their unfair lending standards. If anything, they are making a bad situation worse. The industry, which has been shouting at Washington throughout this year, cannot afford to go quiet on this issue.
– Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]
[i] (Please address all comments regarding this opinion column to hallp@sme-online.com.)[/i]
