FHA News : HUD Issues Final Condo Policy Decisions

Written By: Stacey Sprain

The anticipated guidance from HUD in regards to the final Condo Policy finally arrived last week in the form of two Mortgagee Letters. ML 2009-46B, which replaces the previously issued ML 2009-19 and ML 2009-46A which communicates additional temporary guidance on a number of topics.

One thing I found very odd when first reading these bulletins was the reversal of the numbering. I find it makes much more sense chronologically to reverse them and read them as if ML 2009-46B is actually 46A and as if 46A is really 46B. So let’s go to 46B FIRST.

December 7th remains the magical date for implementation of the new condo review and approval requirements. For cases pulled on and after December 7th, the condo project must either be currently approved on the approved condo list athttps://entp.hud.gov/idapp/html/condlook.cfm or must be reviewed and approved before the case can close with FHA financing.

HUD still offers the two approval options- DELRAP and HRAP. DELRAP stands for Direct Endorsement Lender Review Approval Process and HRAP stands for HUD Review Approval Process. One major change from ML 2009-19 though is that HUD will allow lenders to mix the two approval options if they feel necessary. Previously it had been communicated that HUD was not allowing DE Lenders to “pick and choose” which projects they were comfortable reviewing and approving. It was an “all or nothing” option. It seems they received a lot of backlash on that requirement and have agreed to allow experienced lenders the option of taking on responsibility for reviewing and approving some projects while choosing to submit others directly to HUD for their expertise on others.

General project eligibility requirements include the following:

1. The project must include no less than two units

2. All projects must be covered by hazard and liability insurance and applicable projects must provide evidence of coverage for flood insurance and fidelity bond insurance when required.

3. For projects whose master insurance policy does not include interior unit coverage, evidence of the borrower’s HO-6 coverage must be obtained and provided.

4. Right of first refusal is now deemed acceptable as long as it does not subject any person to discrimination as listed or defined under the Fair Housing Act regulation 24 CFR part 100. In short, this regulation states that discrimination associated with the sale of or rental of housing because of race, color, religion, sex, handicap, or familial status is not to be tolerated under United States Policy.

5. No greater than 25% of the total project’s floor space may be used for commercial purposes, the commercial business(es) must be homogenous with residential use, and must be free of adverse conditions for the occupants of the condominium units. Note- The word “homogenous” is said to mean the following: All of the same or similar kind or nature; A term used to describe an area or neighborhood where the property types and uses are similar and compatible; same, alike, or unvarying in consistency, or components; The same or similar material throughout; Uniform in structure or composition.

6. No more than 10% of the units can be owned by a single individual or investor.

7. No more than 15% of the unit owners are allowed to be delinquent on their HOA fees.

8. Evidence of a minimum 50% pre-sale must be presented in the form of any of the following:

• Evidence of closed sales;
• Copies of executed sales agreements between seller and buyer with evidence of the buyer’s lender’s commitment to lend;
• Chart, spreadsheet or tracking sheet from the builder/developer displaying the sales data along with a signed certification statement, a sample of which is attached as Attachment F in ML 2009-46B.

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The Certification requires the builder/developer to sign and certify as to the following:

The undersigned hereby certifies that in lieu of providing (1) Copies of sales agreements and evidence that a mortgagee has issued approval; or (2) Evidence that units have closed and are occupied; the Developer/Builder has attached to the signed and dated certification, a list documenting all units sold, under contract or closed (i.e., and excel spreadsheet). This information will be used to document the required minimum presale requirement of 50 percent.

Title 18 U.S.C. 1014, provides in part that whoever knowingly and willfully makes or uses a document containing any false, fictitious, or fraudulent statement or entry, in any matter in the jurisdiction of any department or agency of the United States, shall be fined not more than $1,000,000 or imprisoned for not more than 30 years or both. In addition, violation of this or others may result in debarment and civil liability for damages suffered by the Department.

9. At least 50% of the units must be occupied by owners or sold to owners who intend to occupy. For purposes of calculating owner-occupancy in units that contain multiple phases, refer to the following instruction:

• On multi-phased projects the owner-occupancy percentage is calculated on the first declared phase and cumulatively on subsequent phases if the ownership of the condominium project remains the same.
• If multi-phasing includes separate ownership per phase, each phase is calculated individually.
• In single-phase condominium project approval requests, all units are used in the denominator when calculating the 50 percent owner-occupancy percentage.

10. Projects consisting of three or fewer units must not have more than one unit encumbered by FHA financing.

Projects consisting of four or more units must not have greater than 30% of the total number of units encumbered by FHA.

HUD will be tracking the number of cases assigned in each project and the FHA concentration will be listed within the condo approval data screens at https://entp.hud.gov/idapp/html/condlook.cfm.

11. The homeowners association budget must be reviewed for adequacy to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project.

Additional requirements, which are referenced in Mortgagee Letter 2009-46B, apply for conversions, manufactured and new construction projects.

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It’s important to note that condo project approval is not required for FHA to FHA streamline refinances, HUD REO Sales or for Site condominiums in most cases.

Mortgagee Letter 2009-46A does offer some temporary good news. Spot loan condominium eligibility has been extended for cases pulled through January 31, 2010. The new condo policy review and approval rules are being phased in starting with eligibility requirements effective December 7th. Project review and approval will be required for non-approved projects effective for cases pulled on and after February 1st.

In addition to the good news on spot loan eligibility extension, HUD has also agreed to allow FHA project concentration to exceed the standard 30% allowance with the ability for project concentration to go to a full 100% in some cases. These temporary limit increases are effective from December 7, 2009- December 31, 2010.

HUD is also offering the ability to calculate owner occupancy off of the number of pre-sold units for proposed and under construction projects still in their marketing phases. Vacant or tenant-occupied real estate owned (REOs), including properties that are bank owned, may be excluded from the calculation of the required owner-occupancy percentage (should be removed from both the numerator and denominator. Plus, they are lowering the pre-sale requirement from 50% to 30% for new construction projects.

In short, the changes offered by these two Mortgagee Letters are positive ones. HUD has offered added flexibilities to allow condominium business to continue thriving. However, I still have concerns about HUD’s ability to handle the capacity of project reviews they are likely to see coming in. I was told that HUD had no plans or budget availability to add staffing in the Technical Review departments at the homeownership centers. (those are the departments that handle condominium project reviews and approvals). For these condo requirements taking effect in December and end of January, I would expect many folks at HUD take vacations and time off during the holidays and winter months. I can only imagine what the waiting times will be for some of these project reviews.

Use this time to assemble your project lists, check approval statuses, start gathering project documents and prepare your project packages for submission NOW before the lines grow longer in Atlanta, Denver, Phili and Santa Ana!

About The Author

Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: contact@mortgageprocessor.org.


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.