Blog of the Mortgage

FHA Spot Approvals Here until: Until February 1st

December 23rd, 2009 8:10 AM

For Months now HUD & FHA have been trying to figure out what to do with the the last remaining "Hot Potato" in the housing industry.
Condominiums.

No one likes to lend on them, FNMA stopped issuing project approvals 3+ years ago. FHLMC was never really that well positioned to underwrite them either.
Most of the MI Companies today won't insure a Condo at all.
FHA has had the spot approval process because many builders in many states didn't bother with project approval as the loan limits for FHA were too low for their projects.
Simply Put Condo's are tough to finance today.
Considering how many of them were built in many of the worst states for housing, I suppose its no surprise that this has happened.
Now however Condo's have fallen so far in price that there are truly deals to be had for first time buyers.
Low maintenance, typically lower priced, close to Urban Centers and transportation etc.
About the only thing wrong with Condo's is that there is a huge supply of empty units.
Many of you have figured out that gaining an FHA spot approval is a great tool to close a handful of additional loans per year.
Many are afraid of this process and my Company is one of the few out there that offers them (only up to $417k Base Loan amount).
The limiting factors have always been:
Minimum 5 units required (to meet 20% rule).
All of this is Changing coming February 1st.
We've seen now the third and final extension of the Spot Approval process by FHA for Condos.
Here are some of the changes posted in the ML (links posted below):

Condominium Changes ML 09-46B (09-46A waivers and extensions)

Lenders can alternate between HRAP and DELRAP

Spot condos are not eliminated until end of January 2010

Increased FHA concentration levels to 50% and 100% in well-established projects (over 1 yr. from construction).

Pre-sale reqmts for new construction lowered (from 51% to 50%)

Owner-occupancy reqmt lowered (from 51% to 50%): Vacant or tenant occupied REO may be removed from the calculation!

Florida projects still require HUD processing

Reserves study requirement eliminated provided certain reqmts are met

All the currently approved projects will migrate to the new approval list and have an extended re-cert time line.

So what does this mean for you and your chosen lenders?
To the First point on this list (from the ML):
I. Approval Processing Options (HRAP vs. DELRAP):
A. Lenders will have two condominium project approval processing options. The applicable documentation requirements will be the same for each option:
1. HUD Review and Approval Process (HRAP).
2. 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.
Under DELRAP, lenders must provide the condominium approval or denial documents to FHA within five (5) business days of final disposition.

This means that any mortgage Banker currently offering spot approvals under investor guides will likely stop offering SPOT approvals all together (My company included).
The reason for that is the assumption of risk on a project by the investor that completes the DELRAP process.

You will find CITI, BofA, Wells and some others all offering Spot approvals to their customers.
The rest of us will only continue to lend ONLY in currently HUD approved projects.
Specifically here's the verbiage that will deter almost every banker away from this business:
I. Mortgagee Liability
Mortgagees who issue condominium project approvals using the DELRAP process are responsible for material deficiencies associated with the project approval and any loan they originate and/or underwrite using the applicable project approval.
Mortgagees who rely upon a condominium project approval issued by another mortgagee are responsible for the loan level certification (Attachment C). With this certification, the lender is confirming that the company has no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent. The lender is also certifying that it has reviewed and verified the condominium project's continued compliance with the initial approval requirements regarding investor ownership, percentage of owners in arrears for condominium association fees, owner-occupancy rate and FHA loan concentration rate, and it certifies that the condominium project continues to comply with FHA requirements.

Some Highlights for Project approval:

V. Project Eligibility Requirements
1. Minimum number of units: Projects must consist of two or more units
4. Commercial Space: No more than 25 percent of the property's total floor area in a project can be used for commercial purposes.
6. Delinquent Home Owners Association (HOA) Dues: No more than 15 percent of the total units can be in arrears

VI. Insurance Requirements
HO-6 Coverage: In cases where the master policy does not include interior unit coverage, including replacement of interior improvements and betterment coverage to insure improvements that the borrower may have made to the unit, the borrower must obtain a "walls-in" coverage policy (HO-6 policy).

V. FHA-to-FHA Transactions
Project Approval is not required for:
a. FHA-to-FHA streamline refinance transactions

At the end of the day, HUD in attempting to relieve themselves of the burden of risk is going to make it much harder for a borrower to obtain a Brokered FHA Condo loan.
I can see local bricks and mortar operations (Wells/Citi/Chase) setting up specialty retails shops dedicated to Condo financing in high concentration areas.
For us in Wholesale though, unless HUD had already approved the project we will not be writing to many more of these loans after February.

Have a great week

Posted by Raoul Badde on December 23rd, 2009 8:10 AMPost a Comment (0)