FHAngst

By Dick Hughes  

SEPTEMBER 24, 2010 1:24 p.m. (0)

Failure of condominiums and their associations to comply with new Federal Housing Administration regulations and lender reluctance to finance purchases without equal compliance is hurting an already difficult condo market.

Only 14 of Greenville’s condominium developments have met the new strictures to qualify for FHA mortgages or, for that matter, financing from conventional lenders who are insisting on equally restrictive or higher lending standards.

Unapproved are some of downtown Greenville’s most exclusive – and pricey – addresses and upscale condominiums fresh on the market.  Nor are most of Greenville County’s long-established modest and low-end condo developments, making re-sales difficult.

Joan Herlong, a broker associate of Prudential C. Dan Joyner, told of a deal that fell through for a buyer with a “sterling credit history” for a condo at Terrace at Riverplace, where two and three bedroom condos are on the market for from $399,900 to $910,000.  The Terrace’s HOA is not approved by FHA.

Wells Fargo’s underwriters disapproved the loan after reviewing “a two-year budget history from the HOA, and it only confirmed ‘red flags’ that appeared in the monthly report,” Herlong said. It was, she said, “a dealbreaker.”

A much smaller deal for a condo in Wildaire in Greenville, where condos on the market sell in the $90,000 range, fell apart when it was discovered that the Wildaire HOA was not approved.

“This was not the first,” said Susan Clary, vice president and broker for Coldwell Banker Caine.

Developers with vacant units are using workarounds to get financing for enough buyers to reach the thresholds to qualify, as the rules state, for “an endorsement of a mortgage on any unit.”

Shelbie Dunn, Coldwell Banker Caine agent for the new 22-unit McBee Station Cityhomes in Greenville, said MetLife has agreed to “warehouse” financing until enough units are sold to qualify in a conventional pool.

Without an FHA-approved HOA, condo owners thinking about selling are stuck if they might need a buyer with an FHA loan.

The lack of compliance among HOAs is “a hidden issue for most buyers and sellers, until it’s too late,” said Herlong.  “Now I’m careful not to even show or list a condo without first confirming that the HOA is financially stable and Fannie Mae/FHA approved.”

Taylor Davis, president of N&H Enterprises, which manages several HOAs, said historically it would take 30 days from agreement to closing but “now buyers have property on hold for months and have to go through four or five lenders.”

Davis said N&H has been working with officers and boards of HOAs, including holding a seminar on the new FHA requirements, to help them understand what they must do.

But, he said, it may take a year or more for some to meet the standards and fees may rise as much as 40 percent to build required reserve and budget balances. Some condo owners may not be able to afford it, he said.

The heads of two of the Upstate’s largest realty firms said while condo sales have become more difficult, deals are getting approved.

Brad Halter, president of Coldwell Banker Caine, said the FHA rules are an “additional hurdle in the condo market” and agents and brokers are instructed to do their own deep diligence before taking a listing or showing a property.

“When you buy a condo, you’re buying into a set of books,” Halter said.

C. Dan Joyner, president of C. Dan Joyner Prudential, said agents are having problems getting financing approved if a condo is not FHA-approved but alternative financing is available at about 1 point above the cost of an FHA-insured loan.

“It’s not sizeable,” he said.

The conundrum comes out of the Housing and Economic Recovery Act of 2008 that required a new approval process for condominiums to qualify for FHA-insured loans, which typically permit smaller down payments than conventional loans. The new regulations went into effect last December.

The FHA put the onus on lenders “to determine project eligibility, review project documentation and certify compliance.”

FHA, a self-financing agency of Housing and Urban Development, was a minor player in the mortgage market before the recession but has become the dominant player in all mortgages as the government’s major tool for dealing with the financial and real estate crisis.

Jerry Brown, deputy secretary of public affairs, said FHA’s market share has increased from 2-3 percent before the economic crisis to 30 percent today.  Even then, Brown said, the FHA is “much more restrictive today than it was before.”

Underwriters always have required a higher level of due diligence for conventional loans for condos  than for single family homes and today are digging deeper into the books of HOAs, even while saying, as BB&T and Wells Fargo said for this article, that they are not marching to the FHA drum.

“When reviewing a loan on a condominium property, there are factors related to the overall condominium development that need to be considered in addition to factors related to the individual unit,” said Josh Dunn, corporate spokesman for Wachovia/Wells Fargo in Charlotte.

Lenders always have been wary of condo mortgages because so much of the value of a condo is dependent on factors beyond the control of the individual owner or lender.

“I’m sure some lenders don’t want to put their money into condos and will do anything not to do it,” said Davis.

He knows of one developer with a 50-unit condominium that is “having real trouble selling the last 10. They are willing to sell at market price but when buyers can’t get financing, they are not buying anything.”