On September 27, 2016, the Federal Housing Administration (FHA) released a proposed regulatory update to its condominium unit mortgage insurance program. On balance the rule has many positive aspects, including a limited “spot approval” process. The rule further allows individual condominium projects to receive an exemption to approval criteria on a case-by-case basis (excepting activities specifically addressed by statute, e.g., transient housing). The rule does not address association lien priority.
The proposed rule is published in the Federal Register as of September 28 and provides for a 60 day comment period, which will conclude on November 28. CAI is further analyzing the regulations and will engage CAI members in grassroots efforts to provide comments prior to the deadline.
A summary of major provisions is below.
Condominium Approval Requirements
- retains the baseline property eligibility requirements
- no transient or hotel purposes (short-term rentals)
- consist solely of one-family units
- full compliance with all applicable federal, state, and local laws, including the Fair Housing Act
- project or project phase is complete and ready for occupancy
- reviewed and approved by appropriate local jurisdiction and approved plat/development plan recorded
- complies with other approval requirements concerning
- title and leasehold interests (I interpret as free assumability)
- control and organization of the condominium association
- insurance requirements
- planned or actual special assessments
- financial condition of association
- pending legal action and physical property conditions
- Commercial space restrictions
- provides commercial space range of 25 to 60 percent
- indicates 50 percent is consistent with residential housing uses
- will provide guidance subject to public comment on exact ranges
- may limit commercial space so that such space does not negatively impact residential use or crease adverse conditions for residents
- FHA loan concentration limits
- provides an FHA-insured loan concentration range of 25 to 75 percent
- actual range to be established by HUD through notice
- Owner Occupancy Requirements
- provides an owner occupancy range between 25 and 75 percent
- actual range to be established by HUD through notice
- will provide also for second home (not investor properties)
- preamble indicates FHA believes 50 percent owner occupancy is consistent with a project having a residential purpose
- Ensures habitability of condominium project phases for high rise and detached or semi-detached projects
- Requires 10 percent budget line item for reserves
- FHA may approve a lower contribution amount
- to be considered for a lower amount association must present reserve study completed within prior 24 months that justifies the lower amount
Authority of FHA to issue changes to upper and lower range limits for approval criteria subject to a range
- FHA will propose targets within the criteria ranges for public comments
- Comment period(s) will be at least 30 days
Exceptions to FHA Approval Criteria
- provides that FHA may approve exceptions to FHA criteria on a case-by-case basis for specified approval criteria
- provides that exceptions to commercial space requirements may be requested
- provides that local economic conditions may be a factor in considering commercial space exemption requests
Approval Timelines and Recertification
- Extends approvals from 2 years to 3 years
- recertification requests accepted 6 months prior to certification expiration or up to 6 months after certification expires
- recertification within the 12 month band to only require updating of previously submitted information rather than resubmission of all information
- if the 12 month recertification band expires, the project must be submitted for full review approval
Spot Loan Approval
- Authorizes spot loan approvals in condominiums that are not FHA approved
- Condominiums rejected by FHA or with a negative FHA action are not eligible for spot loan approvals
- FHA will not approve spot loans if the FHA concentration rate in the condominium equals or exceeds 20 percent of mortgages in the project
- FHA will establish a FHA concentration rate in range of 0 to 20 percent and may adjust the target concentration rate within this range by notice
- Lender must certify the condominium meets all FHA approval requirements at loan endorsement
Site Condominiums
- Establishes definitions of site condos
- provides that insurance and maintenance costs are the sole responsibility of the unit owner
- provides that assessments may be used solely for amenities outside the footprint of individual sites
As a whole, CAI is pleased with the proposed regulations and believes they support condominium association boards in providing greater flexibility and less burden than current process. CAI will continue to analyze these propose rules and will provide comments to FHA prior to the deadline.
To read the proposal in full, please click here. Comments are due by November 28.
