FHA Proposes New Condominium Development Approval Process

The Federal Housing Administration yesterday proposed new regulations governing the approval process for condominium developments.  

“FHA proposes to reinstate spot 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,” FHA said.

FHA asked for public comment on a proposal to create a “range of thresholds” required for FHA approval including the minimum percentage of owner-occupants in approved condo developments and limits on commercial and non-residential space. “Ultimately, FHA will be able to specify new owner-occupancy, commercial/non-residential and single-unit thresholds within the proposed ranges through a notice, handbook or mortgagee letter,” the agency said. 

FHA said it plans to modify its condominium rules to ensure financial soundness and project viability in a more flexible and responsive manner.

The proposed rule includes the following provisions:

Minimum Owner-Occupancy Requirements
The agency currently requires that approved condominium developments have at least 50 percent owner occupancy. “While having too few owner-occupants can detract from the viability of a project, requiring too many can harm its marketability,” FHA said. “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.”

Commercial/Nonresidential Space Limits
FHA currently requires that commercial and nonresidential space within an approved condominium development not exceed 50 percent of the project’s total floor area. It anticipates maintaining this requirement in the near term. But the agency may modify this limitation by establishing a range between 25 and 60 percent to allow any needed future adjustments. 

“Mixed-use developments are a way to integrate housing, land-use, economic and workforce development as well as transportation and infrastructure development,” FHA said. “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.”  

Single-Unit Approvals
Under certain circumstances, FHA also proposes insuring mortgages for some condominium units in developments not currently approved.

An individual unit may be eligible for single-unit approval if: 

The condominium 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;
Or the unit is not a manufactured housing condominium project or located in a two-to-four-unit project, among other circumstances. 

Condominium Project Approval Eligibility
Under the proposed rule, FHA and participating lenders will not approve proposed or under-construction projects, but 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,” FHA said. 

Lender Review and Approval Authority
The proposed rule would also codify requirements for FHA Direct Endorsement lenders to meet to receive Direct Endorsement Lender Review and Approval Process authority for condominiums. 

FHA proposed that a lender must be unconditionally approved for the Direct Endorsement program and meet the following conditions to be granted DELRAP authority:
–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.