Written By: Stacey Sprain
As I’m sure we’ve all learned by now, HUD announced late last Wednesday afternoon that another extension had been issued in regards to the implementation of the new condominium project approval procedures mentioned in Mortgagee Letter 2009-19. I, for one, am extremely grateful for the additional time; though the extension was issued just as I was wrapping up a very thorough review of the Mortgagee Letter- go figure!
I’ll be honest- condo project reviews are not near the top of my list of favorite things to deal with. I saw the length of that Mortgagee Letter when it first came out, I started reading it, ADHD kicked in, I tossed it aside and kept it on my list of things to review when I got to it. Well last week, I finally got to it! And I also came away from it with a long list of questions and complete confusion as to why on earth any of us brokers or lenders would be the least bit motivated to participate in the DELRAP option. The risk is HUGE!
Now I can tell you this though- for lenders who have the staff and expertise to afford them a department of knowledgeable and experienced staff with direct access to legal opinions, these new project review and approval options are golden and being able to offer DELRAP will help them stand out in their market. But somehow I don’t think we’re going to see very many jump right up at the chance.
Condominium project reviews are very complex. The list of exhibits alone is completely overwhelming. Refer to Attachment A which includes a listing of 16 different document sets and start adding up the inches of paper. I’m thinking, wow, one project might have a pile of condo docs about three feet high- what a fun job for somebody else!
I came away from my review of the Mortgagee Letter with a pile of notes- let me see if I can explain them as they may help put some of the risk concerns in perspective.
1. It states clearly that the DELRAP option is only available to lenders with full DE designation who have staff with knowledge and experience reviewing and approving condo projects.
How many of us really have that knowledge and expertise?
2. Page 7- Letter E- A lot of folks missed this one and this was the one thing that grabbed my attention the most, to be quite honest. This paragraph states that all of us lenders have to make up our minds which option we are going to utilize and stick with it. WE cannot pick and choose which projects we are comfortable approving and which we want to send in the HUD to review and render decision on. If we start reviewing projects under DELRAP, we are required to send in our first five files to HUD for review so they can make sure we know what we’re doing. In sending in those cases, it puts us on the “DELRAP Radar.” At that point HUD knows we’ve elected to go DELRAP and we cannot change our mind after that.
Now in HUD’s defense, I get this one. I don’t like it but I get why they felt it necessary to put it in writing. If they don’t, they will have absolutely no control on volume and will have no idea what to expect in terms of the number of project approval submissions they’ll have coming. Within six months or so after this rolls out, they’ll have a pretty good idea of who the DELRAP lenders are so they won’t have to expect any more project review requests from those folks. They’ll also know which lenders are sticking with HRAP and will get an idea of how much project activity certain areas have so they can better gauge their own staffing needs.
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But the thing that is concerning about that is say for instance a lender decides to hire in a department of experts to manage their condominium project review and approval department but for whatever reason, the department experiences extreme turnover, the lender can’t maintain the right staff, can’t keep positions filled because they are so demanding, etc. The lender may reach a point where they can no longer handle DELRAP. Are they then completely stuck? They can’t then turn to HUD for project reviews while they try to get a better grip on their vision for their department? Seems a bit extreme to REQUIRE all lenders choose their method of review and approval without option to change their minds.
3. Lenders who choose the DELRAP option must certify compliance with Section 203(b) of the National Housing Act and 24 CFR 203 of HUD regulations.
Before we would even know what we are certifying to, we would need to pull and read through federal regulations. (This part right here just lost the attention of about 90% of those who were reading the Mortgagee Letter and gave them ongoing nightmares).
4. It states that we can obtain an attorney opinion letter if we wish but that we as the lender are still completely responsible for certifying that the project meets all requirements.
The concerns on that one need no further explanation.
5. One thing that hasn’t changed much-We must certify that no greater than 30% of the project is encumbered by FHA-insured mortgages.
Now come on- seriously? We can’t get that information most of the time on the spot loan questionnaire as it is! Name me an HOA who knows how many of their units are financed FHA? Why would they keep track of that and why would it matter to them? With privacy laws as they are now, we can’t just have a title company pull the recordings for all units in a project any longer either. So aside from obtaining a list of all unit addresses within a project and running case queries in FHA Connection for each individual address to check for hits, how on earth are we expected to do that? Say there are 650 units in a project- is someone supposed to sit and pull 650 case queries to determine whether or not each unit has an FHA case attached to it? Crazy!
6. Once a DELRAP lender reviews and approved a project, they are responsible for inputting the correct project approval information.
So say Lender2 happens to have a unit in that same project. Lender2 relies on the project approval information entered by Lender 1. What if Lender1 has a file audited and for one reason or another, HUD determines Lender1 approved a project in error. How liable is Lender1 for Lender2’s loan which closed based on Lender1’s approval information?
Also- How confusing will it be for everyone when different DELRAP lenders end up reviewing and approving different phases in the same project? Not to mention how confused will the builder be?
7. DELRAP lenders are responsible for maintaining all of the condominium project document exhibits listed on Attachment A.
The question is- what are we looking for as we review them? Why isn’t that information clearly covered? I can request and collect piles of documents all day long but if I’m not told what to watch out for, how can I determine if any one thing makes a project not approvable?
8. In the past, FHA and VA project approvals have always been interchangeable. Will that still be the case once these new condo approval procedures roll out? If a project is on VA’s approval list, can I assume it will be accepted by FHA?
9. One factor that renders a project non approvable is if it is considered a condotel. Nowadays we’re finding that internet searches on projects and HOAs are bringing forth advertisements for rentals and rental agreements that some lenders interpret as the project being deemed a condotel.
HUD’s position is very vague in this area. How do we know whether or not HUD would side with out conventional lenders who are taking the condotel research to the extreme?
10. DELRAP lenders must certify that the project maintains acceptable insurance.
I’ve hunted everywhere and find nothing specific on condominium project insurance requirements for HUD.
By now I would imagine the concerns I’ve outlined above are enough to make your head spin. Mine has been spinning for over a week because I just do not see that many lenders will have the ability to take on the DELRAP option. What this means is that if HUD hasn’t planned for a complete overload of project approval submissions, turn times for project reviews and approvals will be out of this world ridiculous and likely will happen very quickly.
The best advice I can offer to everyone in the meantime is to start reviewing your market areas with your realtors, get lists of local projects together and start spread sheeting approval statuses NOW. It’s crucial to establish how many non-approved projects you have in your area so you can start preparing to get those projects submitted for review and approval ASAP.
In the meantime, we’ll all await HUD’s much-anticipated Mortgagee Letter which is said to be announcing some minor changed to the content of ML 2009-19. So far, I’ve not been able to gather any inside information on what the changes may be but as soon as I know, I’ll certainly pass the information on.
If anyone learns of any lenders who will be offering DELRAP review and approval, please let me know so I can pass on the information for everyone’s benefit!
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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: firstname.lastname@example.org.