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New FHA Rules Affect Condo Purchase After 2/1/10

Sat, 06 Feb 2010 20:38 GMT

The new FHA guidelines announced by The Department of Housing and Urban Development (HUD) last November is causing more headaches for lenders and buyers/sellers alike.

With the new condominium approval process, there will be fewer condo properties that are eligible for FHA financing which prevents first-time buyers from purchasing any condos that are for sale on the market. There will be less than 10-20% of FHA approved condos available in any given market in the U.S. so you can see why this presents major problems in the condo world. What will happen to the rest of condo projects that are not FHA approved? The answer is the pool of buyer will be limited to cash buyers or conventional buyers with 20% to 30% down payment only.

Beginning 2/1/10, new FHA rules are in effect:

- FHA spot approval is gone. FHA condo loans that required an FHA spot approval are no longer available. This mean no more spot appraisals after 2/1/10 so it will be harder to get an approval on a condo project unless it has been approved by HUD or one of HUD’s approved lenders. Effective for all case numbers issued on or after 2/1/10, all previous FHA condo approvals will be eliminated and condominium projects must be re-certified by HUD. (Previously, FHA spot approval allows an FHA-approved direct lender to approve a specific condo unit even if HUD hasn’t FHA-approved the building. Spot eligible condo buildings must be 4 units or larger, 90% sold, 51% owner-occupied, and no single entity can own more than 10% of the project. Unit owners must be in control of the HOA for 1 year, and the HOA must have roughly 50-60% of annual budget in reserves.)

- Going forward there will be two approval methods for FHA Case numbers ordered after February 1, 2010: HUD Review and Approval Process (H-RAP), DE Lender-Approval and Review Process (DEL-RAP).

- All FHA case numbers issued AFTER 4/5/10 will require the up-front PMI of 2.25% (this is increased from 1.75% today.)

- Early summer – Seller contributions on ALL FHA loans will be reduced to 3% (this is reduced from an allowed 6% today.)

- FHA has waived the flipping rule for all purchase made after 2/1/10. Private sellers and investors can now sell their properties to FHA buyers without having to wait 90 days (seasoning.)

After 2/1/10, Spot Approvals are eliminated and HUD must directly approve entire condo buildings, a 1-3 month process. If a buyer who is looking for an FHA condo loan on a non-FHA approved project, now it will be very difficult to do so.

Currently, there are 67 condo projects in Jacksonville Florida market that are on FHA approved list. Most condos in Jacksonville no longer qualify for the FHA loan. Most lenders will not lend on condos unless you have 20%-30% to put down. This will definitely slow sales and end up decreasing values in certain segments of the condo market throughout the country.

Right now if you are looking to buy a condo, you have two choices:

1. Choose the projects that are listed on the FHA approved list.
2. If the projects are not currently on the FHA approved list, seek condo approval directly with HUD (which administers the FHA mortgage program)

My recommendation is to buy NOW and buy new construction as most builders will pay up to 6% in sellers contribution (this will be limited to 3% soon.) If you need to buy a resale, you need to find out first if the condo you are interested in is on the approved list at https://entp.hud.gov/idapp/html/condlook.cfm.

There are different ways to search but I suggest you start searching by zip code or the legal name of the condo community. A good portion of the approved condos are listed by mistakes, so if you don’t get a hit on the first try, don’t get discouraged. If the condo project you are interested in is already on the approved list, you can move forward. But the lender still has to certify things about the current condition of the condo project. Whether this is a long time approved project or one approved last week, the lender still has to verify the following:

- Is the condo project involved in any litigation?
- Are there any pending special assessments?
- Does any single entity own more than 10% of the total units?
- Are more than 15% of the owners delinquent with their association dues?
- Are at least 51% of the sold units owner-occupied?
- Does the project meet the requirements for FHA concentration (no more than 50%, unless certain conditions are met)?

The lender goes through these questions using a condo questionnaire sent to the condo association or the management company. Please keep in mind that there are new projects that are being added on to the FHA approved list . Every time HUD (or a direct endorsement lender, eventually) approves a unit, all the other units in that project (up to the maximum concentration) will also be placed on the FHA approved condo list. And HUD is bending some rules to make more projects eligible. When HUD released the new guidelines last October, all projects that were not on the approved list last year would not be included on the approved list until they are “re-certified.” HUD is now giving these properties a one year grace period, so they will be on the list as eligible up until 12/7/10. The re-approval process for these projects will be much simpler than the process for new projects (brand new constructions.)

DILEMMA:

With increasing tougher lending guidelines through conventional financing, FHA spot approval has been an answer for most lenders to obtain condo financing for their buyers. In the past, FHA was deemed unnecessary as the approval process was time consuming and paperwork intensive for developers to go through. When the real estate market was red hot, home prices skyrocketed and lending requirements were easy for most buyers to qualify (remember the time when people with no income, no asset, no money down, and no job could buy a home?) Developers didn't have to get FHA approved for their condo projects. It's not surprising we have a small numbers of condo projects that are on the FHA approved list. Nowadays, developers have to petition for a condo project approval when they are building a community (brand new or condo conversion) if they want FHA financing available to buyers. The FHA spot approval was a way to approve one condominium unit, not the entire building. It was part of the purchase process; while the lenders went through the work of approving the borrowers, they would approve the condo unit at the same time. It was a great program and it helped many buyers obtained FHA financing with limited cash and down payment. However, there were some issues:

- The FHA spot approval did not apply to smaller buildings so condos less than 4 units could not qualify for the program.

- The FHA spot approval did not accept condos with “First Right of Refusal” language written in condo docs. The reason being it can be used to discriminate some buyers.

From HUD’s point of view, the spot approval presents problems because HUD did not have control and loans were closed and funded on properties that did not meet the guidelines. So the new condo approval process was introduced to address these problems. The new condo approval process allows properties that have the “First Right of Refusal” language, and it can be used with projects as small as 2 units.

Under the new guidelines, lenders can approve a new condo in two ways:

1. Go directly to HUD (HRAP) and file all the paper work directly with HUD. Most developers have done this in the past.

2. FHA Direct Endorsement lenders (DELRAP) would have the authority to approve the projects on their own. This works similarly like spot approval. When the borrower buys a new condo, the lender will scrutinize the building as part of the approval process and will approve the project at the same time. Once a direct endorsement lender approves a project it will be added to the FHA approved list and then any other lenders who make FHA mortgages will be able to provide FHA financing for the entire project. However, there is a flaw in this process and I am sure they didn't think of the consequences:

Under the new FHA condo approval process, HUD needs more documentation and more express warranties from the direct endorsement lender approving the project. The deadline for this was extended twice while HUD tried to iron out the kinks and get the lenders on board, and they allowed the spot loan to continue as a way to keep financing open. But now the spot loan is gone and the new improved process is not ready to take place.

Condo buyers can still buy anything that is currently on the FHA approved condo list, but what are the options if they want to buy in a building that has not been approved? And how about developers or sellers who own the condos? What options do they have for getting their project approved?

Being able to finance with FHA is a a real competitive advantage in this market. Any properties with FHA financing are selling quicker and this appears to make them more valuable. There are also a lot of newer properties that do not meet conventional guidelines because they have not sold and closed enough units but would be eligible for FHA financing.

The FHA saga continues…

Government Ends Federal Support for Mortgage Rates

Tue, 26 Jan 2010 22:24 GMT

Expect low mortgage rates to end in March 2010. Washington Post ran this article this week:

For more than a year, the government pulled out the stops to revive homebuying by driving down mortgage rates.

Now, whether the housing market is ready or not, the government is pulling out.

The wind-down of federal support for mortgage rates, set to end in two months, is a momentous test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. The stakes for the economy are massive: If the market again falls into a tailspin, homeowners could face another wave of trouble, and it would deal a body blow to President Obama’s efforts to get the economy on track.

Keeping the mortgage rates at historic lows, which required a commitment of more than $1 trillion, was viewed within the administration as a central plank of the economic strategy last year, senior officials said. Though the policy did not attract as much attention as rescue efforts to bail out banks, it helped revitalize homebuying in some parts of the country and put money in the pockets of millions of homeowners who were able to refinance into lower monthly payments, the officials added.

“We did what we thought was necessary to stabilize the market, but we don’t think the government should continue special efforts forever,” said Michael S. Barr, an assistant secretary at the Treasury Department. “As you bring stability, private participants come back in. We do expect this now that the market has stabilized. I’m not going to say there will be no effect on rates, but we do think you are seeing market signs and market signals that there should be an orderly transition.”

A few federal officials and many industry advocates disagree, saying the government is exiting too soon. They offer dire warnings of higher rates and a slowdown in home sales. Fed leaders say they will end a marquee program supporting the mortgage markets in March. Obama’s economic team, led by Treasury Secretary Timothy F. Geithner, has decided not to replace it and has been shutting down its own related initiatives.

Over the past year, these programs have enabled prospective homebuyers to get cheap loans, helping those buying and selling property as well as those eager to refinance existing mortgages. If the end of the initiative drives up interest rates, say from 5 percent to 5.5 percent, homeowners could be deterred from refinancing, industry officials say. A sharper increase in rates could make homes too expensive for many buyers, forcing them from the market and causing the recent pickup in home sales to stall.

“Mortgage rates are the lifeblood of the housing market, and we have cautioned the Fed about the sudden stoppage of this program,” said Lawrence Yun, chief economist of the National Association of Realtors.

But senior government officials said it could be hard to reverse course without damaging the credibility of the Fed and the administration. If the government loses the trust of the financial markets, preparing them for policy changes could be tougher, possibly resulting in economic disruptions. The officials said they also worry that the mortgage market is becoming overly dependent on federal support, inserting the government too deeply into private enterprise.

Only a new crisis would be able to persuade the administration and the Fed to change their minds, officials said.

“This is a worthy experiment to see if they can begin exiting after providing an unprecedented amount of money to one sector of the economy,” said Mark Zandi, chief economist at Moody’s Economy.com. “It’s a close call, though. I can see why they are debating it.”

The Fed’s policymaking body sets a key interest rate at periodic meetings, which in turn influences rates for all kinds of loans. But mortgage rates also are shaped by the health of the market financing these loans.

Banks typically create giant pools of home loans and turn them into securities that can be traded on the open market. When the system is working, many investors buy these mortgage-backed securities, providing a stream of money for lenders so they can make loans at relatively cheap rates. But the trading of these securities seized up when the financial crisis struck and panicked investors. Government officials feared that the mortgage market would collapse.

The Fed and the Treasury stepped into the breach, becoming the only major buyers of these mortgage-related securities, and they kept the mortgage market flush with cash. The Treasury spent about $220 billion, and the Fed pledged $1.25 trillion, the single largest foray the central bank has made into the markets since the onset of the crisis. In essence, the Fed has been printing money and funneling it to people looking to buy a house or refinance an existing mortgage.

At the same time, the federal government stood behind mortgage-finance companies Fannie Mae and Freddie Mac by taking them over and pledging to cover their losses. That helped the firms lower borrowing costs, since lenders know they can’t fail, and the companies passed on their savings to mortgage borrowers in the form of low rates.

Combined, these federal efforts helped push down the rates ordinary Americans pay for a mortgage. The 30-year fixed-rate mortgage declined from 6.04 percent in November 2008, according to Freddie Mac data, and hit an all-time low of 4.71 percent about a year later.

Refinancings surged, while homebuying perked up. Existing-home sales climbed nearly 10 percent in September, their highest level in more than two years.

The policy was the government’s most effective salve for the ailing housing market at a time when other initiatives, such as the administration’s attempts to modify the mortgages of struggling homeowners, produced far more disappointing results.

Now the government wants to end its support for low rates and has been striving to persuade others to buy mortgage securities.

The success of this approach hinges on the willingness of private investors, from China to big Wall Street funds, to buy large amounts of the mortgage securities and fill the void left by the government.

On Christmas Eve, Treasury officials announced a move that would cover losses suffered by investors who buy these securities from Fannie Mae and Freddie Mac, which together now back about half of the nation’s $12 trillion mortgage market. The goal was simple, officials said. They wanted private investors to be reassured that mortgage securities are safe to buy.

As the economy showed signs of recovery at the end of last year, the administration and the Fed decided to end their support.

The Treasury stopped buying mortgage securities in December. The Fed said it would taper off purchases gradually, ending them by March 31.

Obama’s economic team could have raised the limits on how much mortgage securities Fannie and Freddie can buy, allowing those firms to replace the Fed’s purchasing program. But Barr said the administration thinks the mortgage business will stand on its own without such special assistance, similar to the way the nation’s biggest banks weaned themselves off federal bailout funds by raising private capital.

“The basic goal is to implement a gradual process where the government’s role in the economy goes down,” Barr said. “It has to be consistent with the basic goal of stability, but it is appropriate.”

Administration and Fed officials expressed confidence that rates will rise only modestly – perhaps a quarter of a percentage point. They attribute their optimism to the lengthy notice they have given the market. The markets already should have anticipated the government’s exit by adjusting interest rates higher. Yet mortgage rates have been falling slightly the past few weeks.

The optimism at the White House and the Fed, however, is not shared across the government. A few senior policymakers at the central bank view the economic recovery as still too fragile, suggesting that purchases perhaps should expand further. These dissenters also warn that mortgage rates could shoot up, perhaps to 6 percent or higher, because private investors buying securities would demand a greater rate of return than the Fed. To reach it, lenders may have to raise rates for consumers.

“Presumably, there is pent-up demand from the private sector, but the question is: At what rate are they going to be interested?” said Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, who has indicated that he supports expanding the Fed’s mortgage securities purchase program.

There also could be unintended consequences to the government’s pull-out. Last year, big investors such as Pimco sold their mortgage-backed securities to the government and used that money to buy bonds and stocks. That extra cash, which propped up stock prices, could drain away after federal support ends.

Real estate and mortgage finance officials said the timing of the government’s exit seems especially ill-conceived, since the Fed’s support would end just a month before a homebuyer tax credit program, which the real estate industry has credited with jump-starting home sales.

Given the importance of the housing market, some industry officials doubt whether the government will follow through with its pledge to exit the mortgage market in March. Fannie and Freddie officials say that the companies together can buy about $300 billion of mortgage securities by the end of the year before they hit their federally mandated limits. Though it appears reluctant to do so, the administration could use that buying power to cushion the blow after the Fed’s program ends, the industry officials said.

“I believe they do want to end it in March, but it’s like all New Year’s resolutions,” said Mark Vitner, a senior economist at Wells Fargo Securities. “The Fed’s New Year resolution is to go on a diet, go to the gym, give up drinking and clean the garage. They might be able to do one of those things, but to do all four is tricky. They have to drain all the liquidity they added to the financial market so we don’t see a resurgence in inflation, but do it in a way so that the economy does not slip into recession.”

Source: Washington Post

U.S. home prices hit six-month high

Tue, 26 Jan 2010 21:55 GMT

U.S. home prices rose for the sixth month in November, fueled by tax credits for home buyers.

The Standard & Poor's/Case-Shiller 20-city home price index inched up 0.2 percent to a seasonally adjusted reading of 145.49. The index was off 5.3 percent from November 2008, nearly matching analysts' estimates that it would fall by 5.1 percent.

The index is now up more than 3 percent from its bottom in May, but still 30 percent below its May 2006 peak.

Tampa's housing prices dropped 0.4 percent for November when compared with the previous month. That came after a 1.6 percent September-October decline.

Like Southwest Florida, Tampa is a market where sales of distressed properties comprise about half of the total.

In Miami, prices were flat from October to November. Prices dropped 0.4 percent from September to October, and the community is down 12.1 percent for the year.

Prices in this region have been showing stability in recent months, according to data released Monday by the Florida Association of Realtors.

December prices in Sarasota-Bradenton were up 5 percent from a year ago and up 4.6 percent from November. The median — the midpoint between the highest and lowest price — was $167,400 during December. In Charlotte County-North Port, the median rose 9 percent to $111,800 from $102,400 a year ago. The price was up 11.8 percent from $100,000 in November.

Rising prices are important to the economic recovery because they make homeowners feel wealthier and lead them to spend more money. Price increases also help restore home equity for the one-in-three homeowners who currently owe more on their mortgages than their homes are worth.

In a research note, Deutsche Bank analyst Joseph LaVorgna wrote that the price improvements in some cities should lead to a $1 trillion increase in homeowner equity by the current quarter.

Phoenix and San Francisco posted the highest month-to-month gains, on a seasonally adjusted basis, while New York and Chicago had the largest declines.

The tax credit for first-time homebuyers had been scheduled to end Nov. 30, but Congress extended the deadline through April, and expanded the program to include a tax credit for current homeowners.

Prices increased for the seventh straight month in San Francisco, where sales in the $500,000 to $750,000 range were strong. Buyers took advantage of the tax credits and low interest rates.

In Las Vegas, prices edged up 0.1 percent, the first month-to-month increase since January 2007. Still, prices are down 56 percent in Las Vegas since peaking in April 2006.

The list of cities with price increases, on a seasonally adjusted basis, also included Los Angeles, San Diego, Denver, Boston and Charlotte, N.C.

While prices have risen steadily on a national basis, some economists predict they will dip again early this year because of high unemployment and foreclosures.

“Until we get job growth, we won't get complete healing of the housing market,” said Jeff Humphreys, an economist with the University of Georgia.

Source: Associated Press and Herald Tribune

Jacksonville home sales up 21% in 2009

Tue, 26 Jan 2010 21:05 GMT

Jacksonville, like most of Florida, ended 2009 with existing single-family and condominium sales up and median prices down.

Home sales were up in the Jacksonville market 21 percent from 2008 to 12,019 in 2009 and the median price of a home dropped 16 percent to $152,200. The area’s condo sales were up 38 percent to 1,429 and the median price of a condo was down 24 percent to $112,100 in 2009, according to Florida Realtors, formerly known as the Florida Association of Realtors.

Sales figures from the Amelia Island-Nassau County Association of Realtors for September, November and December were not available, however.

Statewide existing home sales rose 31 percent to 163,148 in 2009 from 124,168 homes sold in 2008. Statewide existing condo sales increased 47 percent to 55,985.

“Continuing to stabilize and revitalize the real estate market is the linchpin to a strong economic recovery,” said Florida Realtors President Wendell Davis, a broker and regional vice president with Watson Realty Corp. in Jacksonville. “Robust housing and commercial property markets generate business, but they’re also key to helping families build a sense of financial security.”

Seventeen of Florida’s 20 metropolitan statistical areas reported increased existing home sales and 18 had higher condo sales through the period, a trend that has continued for about a year and a half now.

Jacksonville had the fourth most single-family home sales of any Florida market last year, behind Tampa/St. Petersburg/Clearwater with 28,617, the Orlando market with 23,994 and Fort Myers/Cape Coral with 16,260. Jacksonville ranked eighth out of 19 Florida markets in condo sales, dwarfed by South Florida markets such as Fort Lauderdale with 9,894 sales, West Palm Beach/Boca Raton with 7,887 and Tampa/St. Petersburg/Clearwater with 7,420.

Florida’s 2009 median sale price for existing homes was down 24 percent to $142,600. Jacksonville also ranked in the middle of the pack for median sale price, above Tampa/St. Petersburg/Clearwater at $137,500 and Orlando at $144,600, but far below the priciest markets in Florida: West Palm Beach/Boca Raton, $239,000; Fort Lauderdale, $205,700; and Miami, $195,300.

The statewide existing condo median sale price was down 34 percent to $108,000 in 2009. Jacksonville had the ninth lowest median price in 2009, above the $52,900 in Orlando and $105,300 in Tampa/St. Petersburg/Clearwater, but below Miami at $142,500. The highest-priced Florida condo markets in 2009 were Fort Walton Beach, with a median sale price of $254,000, and Pensacola, $240,300.

Nationally, home sales rose in 2009 for the first time since 2005, by 4.9 percent from 2008 to 5.2 million.

National home sales, which included single-family houses, townhomes, condominiums and co-ops, did see a lull in December, however, falling 16.7 percent to a seasonally adjusted annual rate of 5.45 million units from 6.54 million in November, but remained 15 percent above the 4.74 million-unit level in December 2008. Analysts at the National Association of Realtors said the drop was caused by first-time homebuyers’ rush to complete sales before the original November deadline for the $8,000 federal tax credit, which has since been extended to April.

Neither Florida nor Jacksonville experienced that lull, however. Florida’s existing home sales rose 4.3 percent from November to 14,630 in December and Jacksonville area sales rose 8.7 percent to 1,287 during the same period.

Source: Florida Association of Realtors and Jacksonville Business Journal

Experts debate impact of tighter FHA rules

Tue, 26 Jan 2010 20:35 GMT

U.S. Department of Housing and Urban Development (HUD) announced on 1/21/10 that new FHA tighter guidelines will go into effect on or after 4/5/10. New changes will include:

1. The upfront mortgage insurance premium for FHA loan will go up from 1.75% to 2.25% beginning April 5, 2010. The upfront mortgage insurance premium is financed into the loan amount and has a minimal effect on the buyer’s payment. The change would raise the monthly payment $5.34 on a typical FHA purchase of $200,000.00.

2. Other changes that are Proposed but not final are:

2.1. The minimum down payment for FHA buyers with a credit score lower than 580 will be raised to 10%. In Florida, we have required a minimum credit score of 600 for some time now. For buyers with a credit score of 600 and above, the down payment requirement of 3.50% will stay the same.

2.2. Allowable seller contributions toward the Buyer’s closing costs and pre-paid items will be capped at 3% of the purchase price. Previously, sellers could contribute up to 6% of the purchase price toward the buyers costs. This change makes sense. In most cases, the buyer’s closing costs and pre-paids can be covered by 3%. The 6% allowable limit inflated property values and encouraged some lenders to charge exorbitant fees.

Tighter lending requirements for loans insured by the Federal Housing Administration may leave some borrowers unable to get mortgages, but economists are divided on the impact they could have on housing’s recovery.

USA Today published the following article on 1/22/10:

The changes, aimed at strengthening the FHA’s reserves in the face of rising foreclosures, shouldn’t hurt too many borrowers, officials say.

“We don’t expect this to have a significant impact on the housing market,” says FHA Commissioner David Stevens, adding that “the moves are designed to get the reserves back up.”

The FHA is playing a greater role in the mortgage market, insuring about 30 percent of new loans, up from 3 percent in 2007. Growing defaults have cut its reserves below the level mandated by Congress, leading to fears that it might need a taxpayer bailout.

FHA-insured mortgages are attractive to borrowers, however, because down payments are only 3.5 percent. That won’t change under the new policies the FHA announced Wednesday, which are to take effect in spring or early summer. Among them:

• New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5 percent down payment. Those with lower scores will have to make at least a 10 percent down payment. The average credit score of FHA-insured borrowers is 693.

• Allowable seller concessions will be reduced from 6 percent to 3 percent of the sale price. The change is intended to discourage inflated appraisals.

• Buyers will have to pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from 1.75 percent now. A $150,000 mortgage would require a payment of $3,375, or $750 more.

“It will slow the growth in demand,” says Joel Naroff, of Naroff Economic Advisors. “Any time you put up roadblocks, fewer people will qualify. This is just the beginning of clearer and more specific requirements so we don’t get into the mess we got into again. In the short term, it will have an effect, but it won’t be a huge effect.”

Dean Baker, co-director of the Center for Economic and Policy Research, says he expects the new FHA requirements will have a significant impact on borrowers, especially first-time homebuyers. Those who are denied FHA-insured loans, he says, are usually unable to qualify elsewhere.

“It’s a big deal,” Baker says. “Some will be unable to get loans. This will have a big hit on the market.”

Baker says it’s not surprising that FHA needed to take such steps, because it’s risky for lenders to issue loans with 3.5 percent down during a time of declining home values and rising unemployment.

While the stiffer requirements may leave some borrowers out of the marketplace, some economists say the measures are necessary to protect the FHA from losses.

Lawrence Yun, chief economist at the National Association of Realtors, says very lax lending and FHA insolvency could hurt the housing market worse in the future.

He says he doesn’t believe the requirements will stall the housing market in light of current low interest rates and a federal tax credit for first-time and repeat home buyers.

Mark Zandi, of Moody’s Economy.com, agrees the changes won’t have significant impact.

“It does highlight more broadly that policy support for the market is starting to wane. The tax credit will end in April; now, the FHA rule changes,” he says. “Policymakers are slowly exiting from their unprecedented support of the housing market to see if it can function on its own.”

Source: HUD and USA TODAY