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FHA ........ Major Condo Approval Change!!!

Well so much for my blog yesterday about not having seen any change to the Underwriting Guidelines lately. This morning my office made me aware of FHA's latest Mortgagee Letter 2009-19 that was issued on June 12th. In this latest Mortgagee Letter FHA is announcing MAJOR change to their Condo Approval Process.

"In accordance with the passage of the Housing and Economic Recovery Act (HERA) of 2008, the Federal Housing Administration (FHA) is implementing a new approval process for Condominium Projects to insure mortgages on individual units under Section 203(b) of the National Housing Act. FHA will now allow lenders to determine project eligibility, review project documentation, and certify to compliance of Section 203(b) of the NHA and 24 CFR 203 of HUD’s regulations. HUD will continue to maintain a list of Approved Condominium Projects. The requirements of this Mortgagee Letter are effective for all case numbers assigned on or after October 1, 2009 except as noted."

This is a MAJOR change to the present Condo Approval Procedure, and while it reduces the documentation and requirements for Full Condo Approval, it will place a lot more work and responsibility on Lenders. The new approval process states "The lender will have two condominium project approval processing options. The applicable documentation requirements will be the same for each option:

HUD Review and Approval Process (HRAP).
Direct Endorsement Lender Review and Approval Process (DELRAP), outlined in this Mortgagee Letter. This option is only available to lenders who have unconditional Direct Endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects"

Once an unconditional Direct Endorsement Lender approves a Condo Complex it will be added to the FHA Approved Condo List, and other Lenders will not have to repeat the process. The new approval process will do away with the need to do an Environmental Study in most cases, and the "Right of First Refusal" will no longer be a reason for declining approval of a Condo Complex.

The other MAJOR, MAJOR change, and this will present a huge problem in my opinion, is that this new approval process will do away with the present "Spot Approval".

"The Spot Loan Approval process as defined in Mortgage Letter 1996-41 is eliminated with issuance of this guidance. The DELRAP and HRAP processes have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a “spot loan” basis"

So now it will become an all or nothing, and a simple two page questionnaire will be replaced by a stack of paper work that is over an inch thick (I saw one the the application packets today). This new approval process will also add significant time to the approving a Condo Complex, as oppose to the quick "Spot Approval" that is now available. Granted that the new approval process once done will not have to be done again, as oppose to the "Spot Approval" which had to be done ever time a loan was done on a Condo in a Condo Complex which was not on the FHA Approved Condo List, but the amount of time and work far out weighs the benefit in my opinion.

Hopefully FHA will re-consider the removal of the now "Spot Approval" option before October 1st and let it continue.

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George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com

Posted by George Souto on 06/17/2009 05:47 AM

Comments (66)

FHA Condo Approvals in the Mortgage / Finance Channel

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Originally posted at: George's Blog: FHA ........ Major Condo Approval Change!!!

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66 Comments on FHA ........ Major Condo Approval Change!!!

JUN

Hey ther!

I see you cut & pasted the letter...I had thought about that too...but there is ALOT more to it..so I am going through all 14 pages tonite..

VERY interesting..

I was hoping it would LIGHTEN The load of getting a project approved!

Darin

Thanks for the info, George. I don't know whether you're a broker or not, but have you noticed the banks taking huge bites of the market?

Hi George - thanks for this update. I just wonder what is going to happen in reality... let's say lender A spends time (money) getting approval of abc condo project... now the next lender can simply piggy back on that! Is that the way you understand this will work. Also, is the criteria for approval spelled out in the letter or elsewhere... can there be a situation where one lender approves and another one does not?

Darin, I just wanted to hit a couple of the highlites that is why I provided a link to the Mortgagee Letter for others to read the whole thing.

Andy, I work for a Direct Lender, in fact a Lender that is approved to do these Condo Approvals. We have a Whole Sale division, and they have been real busy, so the Brokers around here are still doing a number of loans.

Joan, yes the Mortgagee Letter spells out the whole approval process, it is easier that the process before, but still a lot of work. And yes one Lender could do all the work and other Lenders get the business.

Great information, but cutting and pasting other's info usually doesn't work here...you have to have permission from the original author...sorry...yikes.

thanks for the info though...

George - This sounds like the lull before the storm. Just when you think things are running smoothly the good ole government steps in with more rules and regulations. It's impossible to keep up with it. Thank goodness we have you to to explain it all.

Karen, I am quoting from the FHA Mortgagee Letter, which I reference, and which is public information provided by HUD, not someone else private work, that is why those parts of my blog have quotation marks. I have also provided a link to the whole FHA Mortgagee Letter for others to read. Everything not in quotes are my own words and not anyone else's.

Donna, that is why I present parts of the FHA Mortgagee Letter that effects most of us. The doing away with the "Spot Approval" is a big mistake in my opinion and is going to make it very hard for owners of Condo's presently not on the FHA Approved Condo List tough to sell their Condo's.

George,

This will adversely affect the values of all non-approved projects!

Thank you harr Presidentay.

Bill

Bill I agree. The time that it will take for a Condo to be approved will probably discourage Buyers from going through it.

George,

Big changes. We all regret to see a stack an inch high of approval paperwork, to start with. But at least when a complex is approved by an DEL, it's done for good.

George - hmmm, giues I see more problems with this than not. So much for encrougaging buyers to use FHA for purchases, or needing to becuase of how they qualify. Seems like most of the condos I have looked up are not on the approved list.

Jeff

JUN

Wow. I kind of liked the spot approval process. (Even though it had to be repeated...)

Another concern with this change: Management companies are charging outrageous fees for the simple 2 page document. I can't even begin to imagine the upfront fees they will charge for the lengthier process.

Once again, someone is going to have to pay, and it will be the consumer.

Thanks for the information. I will print this out and read it carefully.

Again. . .

Everything the government touches turns into crap.

BTW, I don't see anything wrong with the "snippets" in this post with a link to the mortgagee letter. Snippets are an exclusion to the copyright laws. I see snippets here intersperced with original content and explanations.

Doing away with the spot approvals is mindless, absolutely mindless.

I would like to see some explanation of how this mortgagee letter affects new construction vs. resale projects.

I think the issue is with condo projects with conforming banks more than FHA. We are not having many new ones built here in metro Detroit right now

George - Doing away with spot approvals is not good, and considering how few condos in Connecticut are FHA approved, I for one am not happy about this change. As usual, instead of making things easier, the government has once again throw up road blocks.

Here is something that happened in our office - Appraiser decided that the Condo Assocaition was telling an "untruth" in reporting the subdivision was 60% owner occupied. He decided it was really 40% as the unaudited tax records indicated this number. Now mind you, a simple review of the county tax records reveiled that owners using P.O. Box were considered non-owner occupant (the subdivision is only two blocks to the post office) AND many of the units addresses included a number followed by a "dash", then a letter. If the address was not entered correctly with the dash and letter, say a "space" was used, then the county records flagged the property as NON owner occupant. The appraiser would not give and we had to go back in for a spot approval for a closing THAT WEEK.

Now with the changes..... This sounds like this closing would be a problem!

I guess we should not worry - the government knows best!

Chuck

Sounds like an opportunity for some dedicated lenders with "Direct Endorsement Authority" to make some money. I think if we decided to do one of these we would collect a substantial fee UPFRONT for the time and work needed to get it approved.

Just because it can be done is no indication that anyone (lenders) will actually do it. If the home owners association is too lazy to apply for FHA approval why not just direct your buyer to a project that is approved and save everyone time and money.

I can just see us spending endless man hours doing all the leg work and then the buyer going someplace else because the rate was 1/15 of a percent lower.

I think it's funny that some people assume that just because the Government comes up with a shiney new plan or guidline that our free enterprise business's will implement it. Most lenders are not 501c3s.

Hi George -- This is very valuable information to know, not great news, but informative. Condo owners will now have even more issues to contend with, depending on their building and where it sits as it relates to FHA.

George, we've been having problems here with condo's for awhile. Like Kris said the management companies charge an arm and a leg to do a review.

Our problem is that many years ago during the housing boom the developers decided on a new get approved quickly concept. They called them site condo's. Now they are single family homes but by using that name has been a red flag for FHA for 2 years now.

By having single family home sites called site condo's it allowed for quicker approvals at your local municipality and not have to go through a plat approval at the state level.

Now it is an issue.

Removal of the spot approval process will kill many condo sales. Too bad.

Follow me on Twitter: http://twitter.com/roykelley

Sounds like quite a bit of red tape to me George. Thanks for bringing this to everybody's attention.

This is great info, I have many condo listings and this is very helpful. Thanks!

I needed this two years ago. Better late than never, I think.

It will be interesting to see what my mortgage loan officer thinks about this. We have had condos approved with spot approvals. I don't know if this sounds like an improvement or not.

More regulations to get through...I guess we better allow more time to closing.

Great information here, and thanks for the summary!

Hey there! Just a quick followup...

I read thru this WHOLE bloody thing last night...Wow...strangulation and regurgitation!

Some of it really hasn't changed...But some has...Did you happen to call MGIC on this ?? or any other PMI company?? was just curious...I have been reviewing this for our group too. What did you think of the forms they included?? I have a CONDO right now...that is only a 12 unit project. 100% residencey..although 2 of them are owned by ONE guy. That puts you over the 10% requirement. Spot approval was an option..No longer.

I am in the process of getting the entire project approved with FANNIE MAE> this is a pain, and cost's about $500.00 bucks to do. However, ONCE that is done, and IF IT IS APPROVED, then EVERY PERSON in there will end up benefitting! I did a blog on Condo's that now I will have to update. But suffice it to say, part of it was about just this!!

Thanks again, especially for being the first one out with it.

btw- I did a cut & paste once on OBama's speech, and even did my own introduction, and summary, and EVEN gave the source and everything else CREDIT FOR IT! Got no points, and for some reason, wasn't even able to receive comments...Hmm...that was a while ago...so I am very interested in what you found with your blog?? Maybe things have changed!

Thanks again...Darin

Esko, that is the spirit, looking at the positive, and not the negative, I like that :)

Jeff, that is a problem because as of October 1st the whole Complex would have to be approved. The positive is that they have made the approval process a little simpler. But yes this will present a problem.

Kris you are right, but if the Condo Association (which is made up of the Condo owners) want to increase their chances of selling their Condo in the future, it would be to their benefit to have the Condo Association initiate the process.

Gitta that is a wise thing to do, because there is a lot in this Mortgagee Letter.

Lenn, thank you. As far as new construction goes, this might actually simplify that process, at least that is my opinion from having read through this once. We are going to be have internal meetings on this so I will try to post more about that hopefully in the near future.

Russ, neither the Fannie, Freddie, or FHA process are a piece of cake, but require a good amount of work. The big advantage in my opinion to FHA is that you still only need 3.5% down to purchase and you don't have to deal with all the additional PMI Bologna.

Sandra, this will be a big problem down in your area, especially Bransford, where most of the Condo's are not FHA approved.

Chuck sounds like you need to take that appraiser off of you Appraiser list if he is doing that. And yes you would even have a bigger problem with this after October 1st.

Melissa, you make some very good valid points.

Chris it is always best to be informed ahead of time so that we can prepare for what is to come. Condo Complex should start putting things for the approval process now so that they can save some time later.

Missy, I can see how that might be an issue. Let's hope that they make adjustments to this new process as they get feed back from Lender, and come up with something that makes a little more sense before October 1st.

Roy, I agree, removing the "Spot Approval" option will not be a good move.

Bill, "red tape" is a good simple way of describing this.

Jessica, get them sold before this change takes effect.

Joe, for some this might be an improvement, but it will not be for most.

Julie, I feel pretty confident in saying that your Loan Officer is not going to like this change :)

Dana, if you have to go through that new process, you better allow a lot more time.

Jeff you are welcome.

Darin, this only affects FHA and does not change the Fannie & Freddie process, so the PMI companies are not an issue here. As far as the cut and past goes, I would have to look at your blog to see why they would not give you points. One thing that I can think of is if you checked off the box that says that this is someone else's content. I would not consider this someone else's content on this blog, because the only purpose for me quoting sections of the Mortgagee Letter was to provide the exact wording for people to form their own opinion. The blog is really about my interpretation of this new approval process, and how I feel it will affect Condo sales in the future.

George, I was not questioning you, your blog, or your blog content IN ANY WAY! I was just looking for advice on mine as compared to yours! Thanks! HOpe you didnt get that impression!

I called FHA resource..boy, you get right thru, but they are NOT much help! They refer you to YOUR OWN DE u/w! Government hard at work! I didn't mean to question this being ONLY an FHA letter! Because in alot of spots, it mentions FHA, but yet, for example, under spot approvals, the letter that it refernces (Mortgage Letter 1996-41) deals with all condo's not FHA specifically. Resource team was no help!

I think one thing to Truly point out here in this letter is that the ONCE YOU HAVE the approval, it is only good for 2 years, and after that you have to get it recertified! There is a process for that...and the reason is that they are looking for litigation, adequate insurance..etc..major changes! Makes sense and is smart actually!

Noone can tell me if they have eliminated SPOT approvals on conventional, and what I was told about USDA< is that the USDA will approve Spot approvals, but the LENDER must...and none of the Lenders do...as they follow FHA rules on these! (argghhh...) kinda makes it moot then! Thanks again! ..- Darin

One Last thing..- FHA RESOURCE TEAM told ME to re-read the section about SPOT approvals! They dont START OCTOBER 1st, they ended immediately upon release of this mortgagee letter! Or, was I just confused by your blog?? That might be...I am having quite the day!! :)

"issuance of this guidance"

Darin no offense taken, so we are OK. I did take a look at the blog that you referred to and the only thing that I can think as to why they would not give you points is because it looks to basically be a reprint on Obama's speech as oppose to picking out parts of it and commenting on it. That is the only reason that I can for offer.

As far as getting answers on the Condo Approvals, it is like anything else, it is tough to get answers especially on something that they have not implemented yer.

Great! Thanks! Im glad! I appreciate the input, and think this IS A MAJOR development in condos;...Interesting that they talk in the letter about streamlining the approval process, but dont say what they did! LOL...>D

UPDATE! Thanks George...I just needed to read on a little further is all! Thanks! - D

Darin, I have only read through the letter once, but as far as I can see the two biggest things that they could be considering streamlining would be the elimination of the environmental study and that approved DE Lenders can do approvals themselves. There are others, but those two standout to me.

WOW -- I thought I left BLOGHEAD comments . . . Thanks Curtis Harris for topping me!

George, thanks for the latest info. It's important for me to keep up with things, so I can 'know of' them, but allow the mortgage specialists to assist the buyers through.

George - Thanks for the update, condos are a big part of our market here and so are FHA buyers.

It has been an interesting discussion. Not much to add: I thought the process before would limit the "freedom" of buyers as to which condos they could purchase based on the strict FHA lending rules. Now it seems to be the lender who will have that control. No longer one organization with their set of rules and guidelines, rather a very large number of lenders with different opinions. I thought we learned from this whole lending mess and want more regulation not less.

Carla .... LOL, Mr Curtis is gone ...... LOL. and thank you for your kind yours.

Virginia, I know what you mean they a big part of our market as well.

Anja, if you read the whole Mortgagee Letter, I think that you will see that the guideline are pretty specific, so I don't think Lenders will be left with much to interpret differently, but time will tell.

George, doing away with spot approvals is madness. Spot approvals aide in getting a condo sold in a non approved FHA complex - imagine what will happen to inventory in these non approved complexes. Why would they find it necessary to muddy up the approval process in getting homes sold? I don't get it

JUN

It sounds like there are just more headaches being added one right after the other.

George, Thanks for the post. Do you have any idea who are the DELRAP Underwiters are?

George,

I read about this a few days ago...I think in my area the condo communities aren't proactive enough to make these changes when you would think they would want to fill all those empty units. Most people are purchasing with limited amounts of money down so I would think its in the best interest of the communities to reconsider it. The only other problem is that some of them don't have at least 20% in reserves and that's a problem.

Just for clarification, are the spot approvals going away BEFORE this process is implemented October 1st? Or can the new process be implemented right now? That is how I understand it and that makes no sense whatsoever. I have a client with an offer out right now on a condo complex that is not FHA approved. If there is not the ability to get a spot approval, will she have to wait until October 1st or just give up getting the condo she loves? She only qualifies for an FHA loan.

As someone mentioned above, government at work sure mucks up what should be pretty straightforward and simple. I thought the government wanted to clean up the housing market and make it go again, not put up roadblocks...

George,

thank you for the info, as I am working with a couple of buyers now, we have run into the problem of the condo complex not being FHA-loanable. Hopefully, this will bring more available properties to a wider market of potential buyers.

George ... Thanks for this article and update on HUD and loan approval system for condos. I agree that FHA and HUD should re-consider their removal of the now "Spot Approval" option and let that continue.

Lynn, I don't get it either, it does not make any sense. Everything you said is right on the money.

Christine, you are right, not being able to do Spot Approvals is going to create a big headache.

Tim, here is a link that should help you find those Lenders in your area "FHA Approved Lender List"

Neal they are hurting themselves and their Condo Owners if they do not take steps to get approved. You are right about conventional condo loans, they are real tough right now.

Barbara, I will be getting more clarification on this, but to the best of my understanding Spot Approvals will available for all FHA Case Number until October 1st, and I believe that they are allowing Approved DE Lenders to begin approving condo's right now. I know that we have started to implement the process.

Stuart, I am afraid that it will be the opposite. Full Condo Approvals are time consuming, unlike the Spot Approvals which could be done very quickly.

Harrison let's hope they listen to the feed back that they will be getting from lenders between now and October 1st, and leave the Spot Approval in place.

Glad to hear it George!! The condo approval process (conv & FHA) as been a thorn in the mtg industry's side for a long time now - It's about time something loosened up!!

Dan

Thanks George, I have already seen the stalled approvals as the banks try to sort out what they can and can't (or will or wouldn't to be more accurate) with condo loans. I will try to stay up to speed with the new developments. And have subscribed to your blog for that purpose. Thanks again Steve

Thanks for the update, your way ahead on dishing out the newest info. Hmmm, where's my lender? Anyway I am not sure about the right of first refusal. There are alot of complexes that still do it in my area with an assinine interview of the buyer and it just 'smells' of discrimination to me. Why do you have to go to this interview - so they can 'see' you. And why would that be?

I haven't had to do any spot approvals but there are alot of assn's that are letting their FHA approval lapse and that's just plain stupid to me! Let's try and save some $$$ but let's watch our home's value plummet like a rock to save $2.

Dan it is kind of like a double edge sword, they are loosening up the Full Approval, but doing away with the Spot Approval. One is an improvement but the other puts Buyers and Sellers at a major disadvantage.

Steve, conventional condo loans are not easy these day, and now with this change they are make FHA harder also. I will try to post any updates that I get.

Lyn I guess the interview process is common in a lot of states, but not here in Connecticut. The Right of First Refusal, basically gives the Condo Association the right to purchase the condo first. You would think that would be a good think, FHA has viewed this as a restriction on the Seller to sell. As of October 1st that will no longer be and issue.

Well I hope in the long run it generates more business for everyone. Right now everyone is scared to do anything.

Gene, I hope your right about it generating more business, but I am afraid that it will have more of a negative impact then a positive one.

JUN

George...thanks for this posting...and this is one of the great things about Active Rain! It's truly educational!

I sell mostly condos, and did not know about this till I read YOUR blog! I forwarded the link to several lenders I'm either in the middle of a transaction with, or work with. I was amazed that they some new nothing about it, others did but didn't really think about it, and the "good" ones said, "Oh yeah, things are really gonna be fun after October 1."

I have a Seller who works for a mortgage company, and they are SOOOOO glad their condo is under contract now, as it will require an FHA spot approval!

This business just gets more fun by the day....NOT!

Thom, we are hoping that with enough input from Lenders that FHA will re-consider their decision to do away with the Spot Approval. It would be a real shame to make the Full Approval a little easier but make the sale of Condo's harder by doing away with the Spot Approval.

JUN

George, I am still looking for information as to the criteria that an Underwriter is suppose to use when evaluating the Reserves of the Condo. Any guidance would be appreciated.

As you have said, I see this as a double edged sword. I suspect that the primary reason for this change is to make sure that HUD only insures the financing of Condo's that have sufficiently funded reserve accounts. HUD does not want new buyers to be hit with a Large Special Assessment that might cause distress. Possibly this is one reason FNMA and others have tightened up on Condo Financing. I wonder if information about Reserves is something that needs to be disclosed to potential buyers and if the Agencies will call for that in the future.

Tim I know that it can't be in the negative, but I don't know if there is a fixed percentage for FHA. I do know that Conventional is 10%.

JUN

This sounds like more bad news for the condo market. I do a lot of business in downtown San Diego and I wish more condos were FHA approved (right now the list only stands at about 8)!

AUG

Good Day. I don't generally feel anything until noon; then it's time for my nap. I am from Mozambique and also now'm speaking English, give true I wrote the following sentence: "Preschool science activities do not always have to be complicated." Thanks for the help :-D, Emalia.

AUG

Timely info - I think the bottom line is that if you have a listing in a condo building that is not approved for FHA or VA financing, then you have almost no chance of selling the unit. Conventional lenders want 20% to 25% down to purchase a condo now and you can't get MI over 80%. So if you have a $150,000 listing in a non-approved condo complex then the buyer will need a minimum of $30,000 down payment - good luck. My consulting firm works with builders and condo boards all over the country to get projects approved with HUD for FHA and VA financing. It is also worth noting that projects that have not filled out the 2 year renewal on time will be kicked off the approved list. Estimates say that 60% of the current approved condos will be suspended for lack of renewal paperwork.

SEP

I own a consulting firm that can help you obtain project approvals for your condominiums. FHA is the best way to get financing for your condominiums even with the rule changes effective October 1st. I have over 15 years national experience in condominium project approvals and have submitted hundreds of projects through FHA, Fannie Mae, and Freddie Mac. I would love to hear from you if you need assistance.

SEP

Steve, how can I reach you? I am a property manager and have several clients that would be interested in your services.

OCT

I have heard that some reverse mortgages lenders are nervous. It seems that some brokers had obtained spot approvals from condo associations saying that the condo assoc. had reserves when in fact they didn't. Proof of having reserves (roof replacement etc.) were needed for the spot approvals. Now, lenders are afraid that FHA will not pay off their reverse mortgage that they are holding for an amount that is less then they can sell the property at foreclosure and that FHA will not pay the lender off if they feel there was fraud in the spot approval. One lender supposedly said that they would sue the people or association who provided the spot affidavit stating that there were reserves when in fact there were not. Anyone heard anyting on this?

Randy.

OCT

As I mentioned in an earlier post on September 3. I have a consulting company, Condo Approval Professionals LLC, that can help those that need their condos approved through FHA as well as the other agencies. I have over 15 years of national project approval experience. Visit us on the web at www.condo-approval.com to find out more about my company and the services we provide. I can be reached at steve@condo-approval.com or by phone at (847)293-2962

Steve Stenger

President

Condo Approval Professionals LLC

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