Repo Houses for Sale Forced FHA to Revise Condo Loan Rules
The soaring number of repo houses for sale owned by the Federal Housing Administration has forced the agency to revise its condo loan rules in order to prevent the worsening of its residential loan portfolio.
According to the FHA, approximately 18 percent of all residential loans it has insured are in default or in foreclosure. Its reserves have also dropped below the threshold set by the federal government.
This week, the FHA released stricter rules concerning the purchase of condo units using FHA loans. It has put limits on the number of condo buyers that can use FHA loans to buy their units and has put restrictions on the purchase of units in condo projects that have a lot of rental units and a large number of defaulting owners. Units in condo complexes that are likely to default because of current financial difficulties are also not qualified for FHA home loans.
The new rules released by the FHA have disappointed a lot of realtors, real estate professionals and developers. Despite the need for the FHA to protect its finances from an overload of repo houses for sale, its loan guarantees are much needed by developers, real estate professionals and realtors to move their properties.
After the release of the new rules, Salt Lake City development firm Garbett Homes canceled its 300-unit condominium project and spent thousands of dollars to convert the project into freestanding homes.
According to Rene Oehlerking, marketing head of Garbett Homes, pursuing condo projects which have less chances of getting sold to buyers using FHA loans does not make financial sense. FHA has ruled that only 50 percent of all units in a condo building can be sold to buyers using FHA loans over the next year. Starting 2011, the share will drop to 30 percent.
The new rules also require that condo builders need to pre-sell 30 percent of condo units in a new building before FHA guarantees loans for buyers of other units. The percentage will also increase in 2011 to 50 percent.
In Florida, where a lot of condo projects went into foreclosure, condo buyers need special approval before they can use FHA loans.
According to David Ledford of the National Association of Home Builders, the new rules will stop developers from pursuing condo development projects. But federal officials reiterated that the new rules are needed to prevent record numbers of FHA repo houses for sale from crushing the agency.
