Thursday, August 20, 2009

Take the Good with the Bad

FHA Mortgagee Letter 2009-19 dated June 12, 2009 has a few good things in it, and a few bad things. I'm not sure if overall it's good for the high rise condo market.

First, I'll mention the good stuff. First off, Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100. That is a major plus for the New York City market where all condos have the Right of First Refusal in the By-Laws. In fact, this has been one of the main reason there are so few NYC condos that are FHA approved. If this goes into effect, there will be an onslaught of condos that are approved.

Next there has been a change in ground up new construction condo approval, in cases where a building permit and a certificate of occupancy (or its equivalent) are issued by a local jurisdiction that performs a minimum of three inspections (typically the footing, framing and final) neither an Early Start Letter nor a HUD approved ten-year warranty plan is required. For those jurisdictions that do not issue a building permit (or its equivalent) prior to construction and a Certificate of Occupancy (or its equivalent) upon completion of construction, a condominium unit that is one year old or less must have either an Early Start Letter (with a minimum of three inspections by an FHA Roster Inspector) or be covered by a HUD-approved ten-year warranty plan (with a final inspection by a FHA Roster Inspector) to be eligible for high-ratio mortgage insurance.
All condominium types are eligible to follow this process (e.g. Multi-family). Projects are still required to be on the FHA-approved condominium list.

This may mean that New York City condos may be approved for the full boat of FHA financing. Any condos in the NYC market that have been applying for FHA approval have been requesting approval for 90% maximum financing due to the expense of the 10 year warranty on all of the units in the building required to go to 96.5% financing. When there are 200 units that warranty can get expensive.

And now for the bad. I'll start off easy with FHA will not accept a temporary Certificate of Occupancy; all units within the building
(where the specific unit that is security for the insured financing is located) must be complete.
Developers usually want to start closing as soon as the Temporary Certificate of Occupancy (TCO) is issued. There is usually a significant delay between the TCO and the Certificate of Occupancy that could stretch longer than it should. Remember these are controlled by bureaucracies.

And here's the rub: Transfer of control of the Homeowners Association shall pass to the owners of units within the project no later than the earlier of the following:
1. 120 days after the date by which 75 percent of the units have been conveyed to the unit purchasers, or
2. One year after completion of the project evidence by the first conveyance to a unit purchaser.
This means that the entire building needs to sell 51% and be turned over the Homeowners Association (HOA) within 1 year of the first sale. No pre-construction sales for buildings wanted to be FHA approved and with the current market sales velocity, it's hard to say whether a 300 unit condo tower is going to sell enough units in 12 months. This seems to be a deal killer and the builder's associations are fighting the whole mortgagee letter based on it.

It's too bad that we got the acceptance of the Right of First Refusal with this at the same time. We almost had something that saved the NYC condo market.