FHA tightens condo lending rules

WASHINGTON, D.C.
October 19, 2009 6:02am

Tougher rules that will determine which condominium developments will qualify for low-interest Federal Housing Administration mortgage loans are scheduled to go into effect Nov. 2.

Under the new FHA rules, a condo development must be 50 percent sold out with no more than 10 percent of the units owned by a single individual. In addition, no more than 15 percent of the homes in the complex can have payments that are past due.

FHA loans are critical to many home sales where buyers cannot qualify for conventional financing. Homebuilders and Realtors groups say the changes will adversely impact condo sales.

The highest use of FHA financing in the United States is reported by Northern California builders, according to a report Monday by Irvine-based John Burns Real Estate Consulting on government loan program impacts on new home sales.

Government mortgage programs have been critical in 2009, the Burns report says. It says that 59 percent of this year's sales have been dependent on FHA, VA or USDA financing programs.

In Northern California, 68 percent of sales so far this year have used FHA financing. In southern California, 48 percent of sales were FHA insured. The Burns report does not breakout the Central Valley separately nor does it separate single-family sales from condo sales.

The new FHA condo regulations are expected to help shore up the agency by reducing its exposure to potential losses.

Also at the end of November, the federal government plans to end the $8,000 tax credit for first-time homebuyers – although that could change.

"The good news for builders is that there seems to be momentum behind the effort to extend the federal tax credit and that the FHA is going to become more conservative, but not significantly curtail operations," says John Burns. "Political winds can change quickly though, so stay tuned."

A spokeswoman for Central Valley congressman Jerry McNerney, D-Pleasanton, whose district includes part of Stockton, one of the hardest-hit cities for foreclosures, says the congressman “has fought hard to make FHA-backed mortgage loans more accessible. He wrote and helped pass legislation to allow more borrowers to qualify for FHA loans and refinancing opportunities.

“He's concerned that affordable and reliable loans remain available and will be closely monitoring the new changes that FHA is implementing.”