On November 6, 2009, HUD issued two (2) new Mortgagee Letters, specifically 2009-46A and 2009-46B. Mortgagee Letter 2009-46A (ML09-46A) is a temporary direction to address market conditions and expires on December 31, 2010. Mortgagee Letter 2009-46B (ML09-46B) is the new permenent guidance for FHA’s condominium project approval process and replaces the direction provided in Mortgagee Letter 2009-19 released June 12, 2009.

ML09-46A will apply to “… all FHA case numbers assigned on or after December 1, 2009 through December 31, 2010.” ML09-46B is “… effective for all case numbers assigned on or after December 7, 2009, except as noted.” And, for all previous condominium approvals issued by HUD, “…they will expire two years from the date of placement on the list of approved condominiums. Further participation in the program after the two-year period has expired will require recertification …”.

Under ML09-46A, the concentration of FHA insured loans within an approved project will be increased to 50% and may be further increased to 100%, provided certain conditions are met. Under ML09-46B the maximum concentration will be reduced back to 30%.

Under ML09-46A the pre-sale requirement is temporarily reduced to 30%, and the use of Spot Loans is allowed through February 1, 2010. Under ML09-46B the pre-sale requirement is raised back to 50% and the use of Spot Loans is eliminated.

There are a number of other issues to discuss and review in these new Mortgagee Letters. I will do more research on each and provide additional information in the coming days.

FHA notice on delay in FHA condominium changes:

Implementation of FHA’s new policy guidance for condominium project approval and condo unit financing will be delayed until December 7, 2009. The new guidance, to be issued within the next two weeks, will: 1) offer additional leniencies to address the difficult market conditions and 2) augment some portions of FHA Mortgagee Letter 2009-19, providing additional information and clarification.

Until the new guidance takes effect on December 7^th, 2009 lenders may continue to use the Spot Loan Approval guidance issued in Mortgagee Letter 1996-41. Further, the site condo and manufactured housing condo project changes that have already been implemented are not affected by this delay.

To read FHA Mortgagee Letters 1996-41 and 2009-19 please visit: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/

Additionally, NAHB staff learned of other areas that HUD is considering changes to in the subject Mortgagee Letter. Specifically, with regards to FHA Concentration, the HUD staff indicated the agency was considering increasing the stated level of “no more than 30% of the total units” having FHA financing, to a level of 50%. While this level is still unacceptable, HUD staff also indicated they may be willing to discuss an exemption procedure that would allow higher levels of concentration. More to come on that issue.

With regards to the presale obligation, 2009-19 stated that “at least 50% of the total units must be sold prior to …” the first closing of a home with an FHA loan. HUD staff has indicated that they are contemplating a reduction in the presale obligation to 30%.

2009-19 also required a “Transfer of control to the Homeowners Association” no later than 120 days after 75% of the units in the total project had closed escrow or 1 year after completion of the project. This could also create problems for new homes builders and HUD staff has indicated they may add a third alternative, that being along the lines of whatever “…time frame is established under state or local condominium laws.”

And, finally concerns regarding the “Recertification of Project Approvals” were not addressed by HUD staff. Under 2009-19, all “condominium project approvals will expire two years from the date it has been placed on the list of approved condominiums.” This means, if a new home builder has a large project that has been selling for 18 months and will not be sold out by 24 months, the project must get “Recertified” for approval to utilize FHA financing. How long will recertification take? What new conditions will apply to the recertified project? What happens to Buyers in escrow during the Recertification process? And, how will concentration and presale requirements be interpreted in the Recertified project are all unanswered questions at this time.

Additional concerns regarding a 50% minimum owner-occupied condition, investor limitations and the impact on resale financing options are all unaddressed by HUD staff at this time. New home builders, lenders and real estate agents from around the country continue to press HUD staff on these questions and more. How and when the issue of the delay in implementation will be addressed and whether a new Mortgagee Letter will be sent out or a revised 2009-19 letter will be issued are also unanswered.

And finally, I continue to be perplexed by why HUD is dealing with such sweeping changes to their Condominium Approval Process in a Mortgagee Letter, instead of going through a more formal regulatory approval process. Mortgagee Letters are usually reserved to deal with specific issues and or interpretations of exiting rules and regulations. 2009-19 is a sweeping and all encompassing change to the Condominium Approval Process. Such change not only deserves, but demands a more formal approval process, providing the public, stakeholders and administrators the opportunity to comment and highlight potential issues for implementation, so that such issues may be thoughtfully and cumulatively reviewed prior to implementation. Why is that regulatory approval process not being followed here?

These two new requirements appear on pages 4 and 5 of Mortgagee Letter 2009-19, dated June 12, 2009. Now, to be honest, the letter also states that these new rules “…are effective for all case numbers assigned on or after October 1, 2009…”. That means, any projects currently under construction, with an approved FHA case number, will not be impacted by the proposed changes. Well, thank goodness for small favors.

Condominium homes are generally the first rung on the ladder to home ownership. They normally provide a more affordable product for move-down and first time home buyers. In addition, current land planning and greenhouse gas emission reduction initiatives focus on increasing density in urban areas to promote transit use and slow the impact of growth on the problems associated with global warming. It appears that HUD is trying to promote the reduction of condominium construction and decreased urban densities by making the provision of FHA financing for condos more difficult to achieve.

My plea is for HUD to reconsider their position stated in Mortgagee Letter 2009-19. Do not make affordable housing more difficult to build and sell. Do not take away the best product builders have to deliver housing affordable to the average citizen. Do not incentivize low density development because your new rules create such great hurdles for the construction and sale of higher density product.

Again, the pendulum has swung too far. The regulators are regulating for the appearance of control, while in reality, they do not understand the impacts they are creating.