|HUD No. 16-146
September 27, 2016
FHA PROPOSES NEW APPROVAL PROCESS FOR CONDOMINIUM DEVELOPMENTS
Proposed rule brings back spot approvals; is intended to be more flexible, less prescriptive and more reflective of market conditions
WASHINGTON - In response to changing conditions in the condominium market, the Federal Housing Administration (FHA) today proposed new regulations governing the approval process for condominium developments. FHA proposes to reinstate single unit approvals in unapproved condominium developments and to require condo projects to recertify their approval status every three years rather than the current two-year requirement. Read FHA's proposed rule (https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-23258.pdf).
FHA is also seeking the public's comment on a proposal to create a range of thresholds required for FHA approval including the minimum owner-occupants in approved condo developments and limits on commercial/non-residential space. Ultimately, FHA will have the ability to specify new owner-occupancy, commercial/non-residential, and single-unit thresholds within the proposed ranges through a notice, handbook or mortgagee letter.
FHA's intent is to modify its condominium rules to ensure financial soundness and project viability, but in a manner that is more flexible where possible and responsive to the market. The proposed rule published today includes the following key provisions that will allow the agency to be more nimble in responding to future changes to the condo market:
Minimum Owner-Occupancy Requirements
FHA currently requires that approved condominium developments have a minimum of 50 percent of the units occupied by owners. While having too few owner-occupants can detract from the viability of a project, requiring too many can harm its marketability. Through this proposed rule, FHA is specifically inviting comment on this issue and is proposing to establish an allowable range between 25 and 75 percent. The range allows FHA to choose a specific percentage that is responsive to future market changes.
The Housing Opportunity through Modernization Act of 2016 (HOTMA) directed the Department, within 90 days of enactment, to issue guidance regarding the percentage of units within an approved condominium development that must be owner occupied. To satisfy the law's requirement, FHA will publish a mortgagee letter in the coming days establishing a new owner-occupancy requirement.
Commercial/Nonresidential Space Limits
FHA currently requires that the commercial/nonresidential space within an approved condominium development not exceed 50 percent of the project's total floor area, and anticipates maintaining this as a requirement in the near term. However, as the agency gains experience with this program, it may wish to modify this limitation and is therefore proposing to establish a range between 25 and 60 percent, which may be specified via subsequent notice, giving the agency flexibility to make any needed future adjustment within this range. Mixed-use developments are a way to integrate housing, land-use, economic and workforce development, as well as transportation and infrastructure development. While the agency acknowledges the benefits of mixed-use developments, in the near term, it believes that allowing greater than 50 percent commercial/nonresidential space may have a negative impact on the residential character of a condominium project.
Under certain circumstances, FHA is proposing to insure mortgages for selected condominium units in developments that are not currently approved. An individual unit may be eligible for Single-Unit Approval if:
- TheCondominium Project is not on the list of FHA-approved Condominium Projects, or the unit is not in a project that has been subject to adverse determination for significant issues that affect the viability of the project;
- The individual unit is located in a completed project that has not yet been approved;
- The unit is not a manufactured housing condominium project or located in a two-to-four-unit project;
- The condominium unit is not a manufactured home and is in a project that has at least five dwelling units; and
- The unit is in a project in which the amount of Single-Unit Approvals is limited to a maximum of 20 percent of the total number of units in the project, which may be reduced to as low as zero percent via subsequent notice.
Condominium Project Approval Eligibility
Under this proposed rule, FHA and participating lenders will not approve proposed or under construction projects; however, condominium projects may be approved in legal phases or upon completion. Condominium projects approved under this rule would be those where the work on the project or legal phase, including buildings and infrastructure of the project or legal phase, is fully complete.
Lender Review and Approval Authority
The rule would codify requirements for Direct Endorsement lenders to meet in order to be approved for the Direct Endorsement Lender Review and Approval Process (DELRAP) authority for condominiums. FHA is proposing that in order to be granted DELRAP authority, a lender must be unconditionally approved for the Direct Endorsement program and meet the following conditions:
- Have staff with at least one-year experience in underwriting mortgages on condominiums and/or condominium project approval;
- Have originated not less than 10 condominium loans in HUD-approved projects;
- Have an acceptable quality control plan that includes specific provisions related to DELRAP; and
- Ensure that only staff members with the required experience participate in condominium project approval.
Under this proposed rule, lenders could be granted conditional DELRAP authority, provided they submit all recommended Condominium Project approvals and denials for FHA review, and may only proceed upon notification of FHA agreement with the recommendation. Once the mortgagee has completed at least five DELRAP reviews to FHA's satisfaction, the mortgagee will be granted unconditional DELRAP authority and may approve condominium projects in accordance with HUD's requirements.
Read FHA's proposed rule (https://s3.amazonaws.com/public-inspection.federalregister.gov/2016-23258.pdf).
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