My CONDOlences…
Friday, 31 July 2009 16:00
My CONDOlences…
I regret to inform you of the impending demise of the Spot Condominium Approval Form and Process effective October 1, 2009.
While this date seems like a point too distant to work into your reverse mortgage itinerary, it will be upon us sooner than expected and now is the time for you to be considering this and other condominium impacts of the passage of the Housing and Economic Recovery Act (HERA) of 2008. (I’m not sure if this makes sense…something might be missing??)
The Federal Housing Administration (FHA) is implementing a new approval process for Condominium Projects to insure mortgages on individual units under Section 203(b) of the National Housing Act. FHA will now allow lenders to determine project eligibility, review project documentation, and certify to compliance of Section 203(b) of the NHA and 24 CFR 203 of HUD’s regulations. HUD will continue to maintain a list of Approved Condominium Projects. The requirements of this Mortgagee Letter are effective for all case numbers assigned on or after October 1, 2009 except as noted.
The best clarity recommendation is to review the Mortgagee Letter 09-19 in detail. A complete copy is available at: http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/.
This article is one of several which will be published to assist you with implementation of the changes. You should note that discussion with the industry continues as well as additional information and clarification from HUD/FHA is expected prior to implementation.
The changes noted are effective with case files pulled in the FHA Connection on or after October 1, 2009 and affect any HECM secured by a condominium unit. No indication as to completion timeframes for those originations under case files pulled prior to October 1, 2009 has been provided at this point.
As you grab your morning coffee and donut, you may want to go back and grab the whole box, as many Underwriters did when they first read the Mortgagee Letter! These changes are going to greatly impact our ability to keep turn times for condominium loan approvals similar to present without the cooperation of all parties to the transaction.
A “bakers dozen” of key areas of the Mortgage Letter affecting the most typical of HECM transactions, the refinance, are highlighted below:
The lender will have two condominium project approval
1. The lender will have two condominium project approval processing options. The applicable documentation requirements will be the same for each option
a. HUD Review and Approval Process (HRAP).
b. 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.
2. The processing options stated above will be applicable to condominium developments that are:
a. Proposed/Under Construction;
b. Existing Construction; or
c. Conversions.
3. The Condominium Project is eligible if it has been created and exists in full compliance with applicable State law requirements of the jurisdiction in which the Condominium Project is located, and with all other applicable laws and regulations.
4. The Condominium Project is ineligible if it is one of the following types: Condominium Hotel or “Condotels”, Timeshares or segmented ownership projects, Houseboat projects, Multi-dwelling unit condominiums [i.e. more than one dwelling per condominium unit or all projects not deemed to be used primarily as residential.
5. Site Condominiums are single family detached dwellings encumbered by a declaration of condominium covenants or condominium form of ownership. Condominium Project approval is not required for Site Condominiums; however, the Condominium Rider (Attachment D) must be included in the FHA case binder submitted for insurance endorsement. Manufactured housing condominium projects (MHCPs) may not be processed as site condominiums; these projects will require approval under HRAP.
6. The Spot Loan Approval process as defined in Mortgage Letter 1996-41 is eliminated with issuance of this guidance effective with casefile numbers issued as of October 1, 2009. The DELRAP and HRAP processes have been streamlined to allow for uncomplicated condominium project approvals eliminating the need to approve units on a “spot loan” basis.
7. Project Approval is not required for FHA-to-FHA streamline refinance transactions or FHA/HUD Real Estate Owned (REO) Division sales.
8. If a lender elects to use the HRAP option, then environmental reviews will not be required for projects that, at the time that condominium project approval is requested, have progressed beyond that stage of construction where HUD has any influence over the remaining uncompleted construction (see the Mortgagee Letter for additional details on Environmental Reviews).
9. The following requirements apply to all Condominium Project approvals:
· Projects consist of two units or more.
· Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
· First right of refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR
· No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogenous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
· One investor may own no more than 10 percent of the units. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.
· No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
· At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.
· At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units.2 For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).
· Legal Phasing is permitted for condominium processing. It is recommended that developers submit all known phases for initial project approval. For purposes of calculating the owner-occupancy percentage:
a. 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;
b. If multi-phasing includes separate ownership per phase, each
phase is calculated individually; or
c. Single-phase condominium project approval requests must meet the owner-occupancy percentage requirement.
10. FHA concentrations have been established for projects consisting of three or less units to have no more than one unit encumbered with FHA insurance. Projects consisting of four or more units will have no more than 30 percent of the total units encumbered with FHA insurance.
11. A current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.
12. Condominium Project approvals will expire two years from the date it has been placed on the list of approved condominiums. This will also apply to all projects currently on the list of approved condominiums. Further participation in the program after this two-year period has expired will require recertification to determine that the project is still in compliance with HUD’s owner-occupancy requirement and that no conditions currently exist that would present an unacceptable risk to FHA. Items that should be given consideration are:
a. Pending special assessments,
b. Pending legal action against the condominium association, or
its officers or directors,
c. Hazard, liability insurance and when applicable flood
insurance.
13. There are quite a number of additional items covered by the Mortgagee Letter including manufactured homes in a condominium association, processing project approvals and certifications, FHA Connection reporting and changes, insurance requirements, environmental information, quality assurance and phasing. Additionally checklists and exhibits have been attached to the Mortgagee Letter for use and reference.
As indicated, there remains quite an amount of information not noted by this article and very relevant to the HECM origination transaction. Over the next few months, investors will be determining their participation and procedures in the approval process as updated information is received from HUD/FHA.
Caution should be addressed with upcoming condominium originations prior to October 1, 2009 to avoid confusion and delays.
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