Talk about unintended consequences. On the one hand the goverment is finally trying to put an end to the toxic mortgage crisis by limiting loans to condos and condo projects that are not solid (a good thing),  but their recent actions and restrictive regulations are making developers put on the brakes (not so good for the economy and future economic growth).

Mores specifically, new lending rules for condominium buyers are already forcing some developers to change or scrap plans for new projects for fear too many buyers will be shut out.

On Monday, December 7, 2009 the Federal Housing Administration started limiting the number of buyers in condo buildings that can get loans insured by the agency. The rules also put restrictions on buildings with poor finances, too many delinquent owners and a high number of rentals.

The tighter lending standards are designed to protect the financial health of the FHA. The move is a clear and immediate blow to condo buyers because the FHA has become a key source of mortgage financing. The agency insures roughly one in four new loans today because buyers need only have a 3.5 percent down payment. Here are a few of the details:

• The new FHA rule allows only half of a condo building’s units to have FHA-backed loans, with some exceptions. That number falls to 30 percent in 2011.
• Another new rule requires at least 30 percent of units in new buildings be pre-sold before the agency insures any loans. That number will rise to 50 percent in 2011.
• Projects in Florida, where the condo market has been devastated, will require special approval before FHA-backed loans can be made.

These stringent rules clearly are retarding development. Government officials, however, say the rules are necessary to ensure consumers are purchasing units in viable buildings and to help ensure that defaults on condo projects don’t rise too high.

For buyers, the new rules cinch already tight mortgage financing. Earlier this year both Fannie Mae and Freddie Mac slapped tighter restrictions on condo loans.

Tags: Condos, FHA, New Regulations

Posted in FHA, Residential Real Estate, Mortgages | No Comments