The Los Angeles Times reported today that the Federal Housing Administration (FHA) is planning significant changes to the rules that currently limit the availability of low-cost FHA insured mortgages for condominium buyers. This will be a welcome change for residential real estate in California, where a major obstacle to homebuyers, especially first-time buyers, is not finding a home to buy, but finding a mortgage to buy it with. With less restrictive standards, condominium prices will stabilize more quickly and the market can move more units out of the “shadow inventory” and into new buyers hands. Such changes will also attract some construction lenders back into the market, as the obstacles to selling the finished condos will be reduced and more predictable.
In order for buyers to use FHA-insured mortgages (such as the 203(b) loan program) for condominiums, the condominium development must be preapproved by FHA; the criteria include the percentage of units occupied by non-owners, how much non-residential commercial space was in the buildings (important for urban developments), minimum pre-sales for new development, an limits on ownership concentration. When the residential real estate bubble began to burst in 2007-08, and condominiums in some markets defaulted in significant numbers, FHA began adjusting the certification requirements for certifying a condominium development. In Mortgagee Letter 09-19, FHA spelled out what are, in retrospect, harsh limits on the number of non-owner occupied units (no more than 50%), and the concentration of units financed with FHA-insured mortgages to no more than 30%. At a time when the mortgage market had nearly collapsed and FHA was essentially the only game in town, this was especially harsh, because it meant that a project needed to have a large numbers of cash buyers who were not investors – a very small client base to work from.