Rich Bouchner New York City Real Estate

FHA loans hit speed bumps

Nationally popular loans, billed as saviors of the condo market, stalling in NYC July 31, 2009 By Candace Taylor

The NV Condo in Williamsburg recently got FHA approval.

Frances Katzen, an executive vice president at Prudential Douglas Elliman, was elated when she found a buyer for the one-bedroom she was representing in a Lower East Side condo conversion.

The transaction went awry, however, when the buyer learned at the closing table that the financing she had been counting on had fallen through, thanks to an obscure loophole in guidelines by the Federal Housing Administration: Loans insured by the FHA currently cannot be issued in a condo conversion until at least one year after the condo has been declared effective.

The buyer "got all the way to the closing and was told that the mortgage was not issued," recalled Katzen, who now refuses to work with FHA-insured loans, despite the fact that the government-backed mortgages are exploding in popularity.

"We're reading about FHA loans, but we're finding it very difficult [for buyers to get them,]" she said. "It's been a very trying time, and disappointing."

The obstacle Katzen encountered is only one of many obscure and ever-changing regulations that make FHA-insured mortgages nearly impossible for many New Yorkers to obtain, brokers said.

With conventional financing elusive, many developers are undertaking the lengthy and expensive process of having their projects FHA-approved, believing it will give them a leg up on sales amid the credit crunch.

But even as the once-rare program becomes more widespread, brokers and developers are discovering that FHA-insured loans are not all they're cracked up to be. What's more, changes to the agency's guidelines slated to become effective October 1 will drastically reduce the number of eligible buyers for the program by capping the number of FHA loans in a given project at 30 percent, even in FHA-approved developments.

"It's horrible what they're proposing," said Philip Sutcliffe, a Pennsylvania-based consultant who specializes in submitting new condo projects around the country for FHA approval. "It's bad public policy at a point when the condo market can least afford to have restrictions placed on it."

Loans insured by the FHA, an arm of the U.S. Department of Housing and Urban Development (HUD), provide lenders with protection in the event that the homeowner defaults. Because the lenders bear less risk, FHA-insured loans require smaller down payments — sometimes as low as 3.5 percent — and allow buyers more flexibility on income, credit scores and payment ratios. In exchange, buyers pay an insurance premium on the loan, which in some cases makes their monthly payments higher than conventional loans.

Until recently, FHA loans were rare in New York City because most homes here cost more than the agency's maximum loan limit. For the same reason, New York developers here generally avoided the expensive and time-consuming process of seeking FHA approval for their new condos, especially since the easy credit markets of recent years made it easy for buyers to get financing from other sources.

But the FHA this winter raised its maximum loan limit here to $729,750 as part of the national stimulus package, making FHA loans more accessible for New Yorkers.

"Six months ago, nobody knew about FHA," said Richard Bouchner, managing director of Commodore Property Group, a mortgage company and real estate brokerage. He said that's changing now that conventional financing requires higher downpayments than in the past, adding that he's gotten several inquiries from buyers looking for FHA programs.

"Most people see FHA as a kind of shining light, something they didn't think they would be able to get," he said.

Meanwhile, many developers recently have rushed to get FHA approval for new developments. Projects that have already been approved include 111 Monroe in Bedford-Stuyvesant, 105 Lexington Avenue in Clinton Hill, NV in Williamsburg, Hamilton Lofts in Harlem and 10-50 Jackson Avenue in Long Island City.

The program is seen as the savior of many of these projects, real estate insiders said.

At 111 Monroe, "I don't think we would have any deals or any potential deals if we did not have FHA," said David Behin, an executive vice president at the Developers Group, a marketing and sales firm that is in the process of merging with another company, the Real Estate Group New York. It has encouraged its developers to get FHA approval. "It's been an enormous help for us."

FHA loans are also gaining in popularity nationwide, according to Adam Glantz, a spokesman for the New York bureau of HUD, who said they are being tapped more frequently by homebuyers across the country, filling the void left by subprime lending.

In 2006, Glantz said, FHA backed only about 3 percent of home loans in the country. Now, that number has swelled to at least 30 percent.

In New York City, the number of FHA-backed loans issued between January and March of 2009 leaped to 2,315, up from 995 in the same period of 2008, said Glantz.

But many New Yorkers are now discovering that securing an FHA-insured mortgage is more difficult than it may first appear.

The program has a raft of often-inscrutable guidelines, many of which disproportionately impact New Yorkers. For example, the FHA does not currently insure loans for purchases of co-ops, Glantz said.

Another obstacle for New Yorkers is that the FHA does not back loans in buildings where the board of managers may exercise a right of first refusal on units being sold. While the practice is rare in other parts of the country, it's very common here, removing FHA loans as an option for many buyers.

New York is "one of the only states that have right of first refusal language in the documents," Sutcliffe said. "We have thousands of projects all over the city that have a right of first refusal."

In response, Sutcliffe said, developers of many new condos are rushing to remove the option from their offering plans.

"I'm working on about 100 projects in New York City, and in every one of them, the offering plan has to be amended to remove the right of first refusal," he said. But it's too late for purchasers of older apartments in buildings where the board of managers already has the right of first refusal. For them, getting an FHA-backed loan isn't an option.

Then there's the one-year delay for condo conversions, which stipulates that if a developer is converting a building from a prior residential use to condos, FHA will not back loans in the building for one year after the condo declaration has been recorded, Sutcliffe explained.

On top of these complications, buyers often don't know until the last minute whether they are eligible for FHA financing because the loans are manually underwritten, Bouchner said.

With Fannie Mae and Freddie Mac, buyers can input their information into a computer and get a formal preapproval. With FHA loans, buyers "don't know if they've been approved until their file gets in front of an underwriter," Bouchner said. "It's a bit frustrating."

He added, "FHA is this really weird, opaque part of the mortgage world." Starting on October 1, FHA is changing some of its guidelines, Sutcliffe said. The one-year minimum for conversions and the right-of-first-refusal requirements will be removed, but they will be replaced by a far larger obstacle: Under the new guidelines FHA will no longer insure more than 30 percent of loans in a given building, even if that project has been FHA-approved.

The change could hurt the condo market because for buyers unable to afford large down payments, "FHA is the only game in town," Sutcliffe said.

It's particularly problematic because FHA-insured loans require 51 percent of the units in a project to be in contract. If only the first 30 percent can get FHA loans, "how are [developers] going to sell the other 20 percent of the units if [they] don't have the financing they need?" Sutcliffe said. "It's almost a self-fulfilling prophecy."

Manny Alvarado, an FHA specialist at HUD, said the agency put the limitation in place to limit its risk in case a project fails. "We're looking at reducing our exposure," he said.

The rule change presents a roadblock for developers who have spent time and money to get their projects FHA-approved and are now depending on FHA-insured loans to help their buyers get financing.

"It's a death blow," said Moshik Regev, the vice president of Absolute Development and the developer of the Prospect & Homes Condominiums at 1236 Prospect Avenue in the Bronx. "They're taking the last market niche that's still out there, and they're going to kill it."

The 18-unit development, where the average purchase price is $250,000, was pre- approved for FHA loans last year, and all but one of the buyers in contract plan to use FHA financing, Regev said.

"It wouldn't be possible for [buyers] to do it without FHA," he said. "To cap the units at 30 percent, it's ridiculous. To me, in this day and age, to do something like that is just terrible."

He said he has an option to buy and develop two lots, one in Brooklyn and one in the Bronx, but he and his partners have put the plans on ice for the time being as a result of the rule change.

"At this point, we put them on hold," he said. "We don't know what's going to happen."

The New York Times reports that SONYMA if offering a incentive for first time home buyers that is similar to the Fed tax incentive, except that it does not run out in Nov of 2009. There are income and home price limits...but hey, something is better than nothing....

New York Times Article

I live in Harlem, which to most New Yorkers, is pretty far uptown. Over the last couple of days I have been spending time even further uptown helping a client find an apartment to purchase in the Inwood section of Manhattan. We have been looking in the 200s, west of Broadway. As one who prides himself on his knowledge of New York real estate, I must admit, I knew very little about upper Manhattan.

Inwood and its surrounding neighborhoods are a real delight. The housing stock is almost all pre-war coops, many in great shape. The A train is near by, and there are a ton of good restaurants and shops. Best of all, is the pricing of apartments. No where else is one able to get so much for one's dollar. 700 sq foot 1 bedroom prewar coops, with original details, go for $300,000. Two bedrooms are also a great deal compared to other New York nabes. Of course if you work downtown, it is a long commute, but if you work uptown or in mid town, it is not a big deal.

Inwood is near the Cloisters, Ft Tyson Park, the Hudson River, an uptown branch of the Met and miles of walking and hiking trails.

It really is a special part of New York...I suggest that you if have not been there, check it out. Go for a hike, visit the Met, and have brunch at the resturant at the Cloisters....not a bad way to spend a summer day!

I have had many clients ask me lately about FHA spot approvals for condo purchases, so I decided to 
go to HUD's web site for the rules of obtaining a FHA spot condo approval.  In a nut shell, a spot approval
 allows a borrower to use a FHA mortgage to buy a condo.  A couple of things need be in place though for a spot approval
to be possible.  Namely:

The owners needs to have had contro of the association for at least a year, 

 At least 90% of the units in the project must have been sold.

 At least 51% of the units in the project must be owner-occupied

   No single entity may own more than 10% of the units

Here are the HUD guidleines for condo spot approvals.  Enjoy!

As always, please feel free t e-mail me at rich@cpg-nyc.com w/ questions about buying or selling New York City real estate.
 

U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

August 1, 1996
 
MORTGAGEE LETTER 96-41
 
TO:  ALL APPROVED MORTGAGEES
 
SUBJECT:  Single Family Loan Production - Condominium Units in
            Non-FHA Approved Projects; Mortgage Insurance
 
     On May 29, 1996, in 61 FR 26982, the Department issued a
final rule in the Federal Register, permitting the insurance of
mortgages on individual units in condominium projects that have
not been previously approved by the Department.  That final rule
established a "spot loan" procedure to provide home mortgage
insurance on individual units in condominium projects where there
is little likelihood that the project's homeowners association
would make the requisite changes to its legal documents (usually
to benefit one association member) to obtain FHA approval.  This
Mortgagee Letter provides further guidance on the use of these
spot loans.
 
     The Department's requirements for condominium projects are
set forth in 24 CFR 234.26 of the Code of Federal Regulations.
The spot loan provisions add a sub-section (i) to this section
and lists specific criteria that must be met.  The new spot loan
regulations also add a new section, 24 CFR 206.51, to the Home
Equity Conversion Mortgage (HECM) regulations.  The HECM program
incorporates by reference the project requirements set forth in
24 CFR 234.26(i).  Therefore, spot loans may be used under both
the Department's Section 234(c) and HECM programs.  Cooperatives
and planned unit developments (PUDS) are not eligible for spot
loans.
 
     The following requirements must be satisfied before a spot
loan is endorsed:
 
         The condominium project must be complete.  There should
     be no ongoing or anticipated addition of any units, common
     elements, and/or facilities.
 
         Control of the common areas of the project must have
been
     turned over to the unit owners association for at least one
     year.
                               -2-
 
         The owners association must provide evidence that the
 
     project has the appropriate hazard, liability and flood
     insurance.
 
         Individual units in the project must be owned in fee
 
     simple or be an eligible leasehold interest.  The project's
     legal documents must provide for undivided ownership of
     common areas by unit owners.  By virtue of this ownership,
     unit owners must have the right to use all facilities and
     unrestricted common elements.
 
         The project's documents should not place any legal
     restrictions on conveyance.  Any provisions that seek to
     limit the free transferability of title is generally
     unacceptable.  Such restrictions include rights of first
     refusal and restrictive covenants.  Certain governmental or
     nonprofit programs designed to assist in the purchase or
     rental of low-or moderate-income housing are exempted from
     the restrictions on conveyance provisions.  The Department's
     policy on the free assumability and transferability of
     property is set forth in 24 CFR 234.66.
 
         At least 90% of the units in the project must have been
     sold.
 
         At least 51% of the units in the project must be owner-
 
     occupied.
 
         No single entity may own more than 10% of the units in a
 
     project.  "Entity" includes an individual partnership,
     corporation, limited liability company, limited liability
     partnership, joint venture, investor group or other natural
     or legal person qualified to hold an interest in real
     property.  The 10% restriction does not apply when the
     ownership of less than three units would disqualify an
     otherwise eligible project.
 
         The Department recognized that the 10% cap on the number
of
     units that may secure FHA insured mortgages in a given
     project can place a small regime at a disadvantage, since
     only a few units will invoke the limit. Accordingly, a two-
     tiered system was established.  For condominium projects
     having more than 30 units, no more than 10% of the units may
     have FHA insured loans at any given time.  Condominium
     projects consisting of 30 units or less, can have up to 20%
     of the units encumbered by FHA insured mortgages under the
     spot loan rule.
                               -3-
 
     Mortgage lenders underwriting spot loans must perform
sufficient investigation and analysis to certify that the
condominium project satisfies the eligibility criteria.  Under
the regulations, mortgage lenders may employ a wide range
of approaches to ascertain compliance with the spot loan
requirements.  Project developers, appraisers, owners,
associations, management companies and real estate brokers are
among the sources of information lenders may use.  To the extent
that the Department has information that can be of assistance, it
will provide mortgagees with that information.  However, it
remains the lender's responsibility to ensure the accuracy of the
information it relies upon in making its certification.
 
     Attachment 1 is a suggested checklist lenders may wish to
use in their underwriting analyses.  It reflects some key
considerations in assessing the eligibility of a project for spot
loans.
 
     The standard Direct Endorsement Underwriter Certifications
applicable to condominiums under standard loan programs and the
HECM program are not sufficient for spot loan applications.  Some
modification is needed.  Accordingly, the following certification
is added to the list of Direct Endorsement (DE) certifications in
Appendix 3 of Handbook 4000.4, Rev. 1, Ch. 1 and to the list of
Underwriter Certification (HECM) in Appendix 3A of Mortgagee
Letter 95-54 :
 
     ( ) The property is in a project that has not received
     prior approval by HUD but the requirements of 26 CFR
     234.26(i) are met.
 
     This certification requirement will be in effect for all
mortgages executed on or after 30 days from the date of this
Mortgagee Letter.  A similar statement may be used until the
requirement for a certification becomes effective.
 
     Local HUD Offices and Regional Processing Centers will
conduct random reviews of mortgage loans insured under the spot
loan program.  Mortgage Lenders demonstrating a pattern of abuse
will be subject to those enforcement mechanisms and sanctions
governing FHA mortgage insurance activity.
 
     The spot loan program is designed to relieve a burden on
homebuyers in successfully-operating, non-approved condominium
projects where FHA involvement is limited; it must not be used to
circumvent the general requirement that a condominium project be
approved before a mortgage on any unit in that project can be
endorsed for insurance.  As previously noted, the approval
requirements for condominium projects are found in 24 CFR 234.26,
(a)-(h).  Additional requirements are set forth in Chapter 11,
HUD Handbook 4150.1 Rev 1, entitled "Valuation Analysis for Home
                               -4-
 
Mortgage Insurance" and reiterated in HUD Handbook 4265.1 ,
entitled "Home Mortgage Insurance - Condominium Units - Section
234(c)".
 
     Questions regarding spot loans and condominium project
approvals should be directed to the Single Family Division of the
local HUD Office.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner
 
Attachment
 
        SUGGESTED CHECK LIST FOR SPOT LOAN APPROVALS
 
_______ 1.  The legal documents of the homeowners association
do not contain a right of first refusal or restrictive covenant.
 
_______ 2.  The unit is part of a condominium regime that
provides for common and undivided ownership of common areas by
unit owners.
 
_______ 3.  The project, including the common elements, and those
of any Master Association, are complete, and the project is not
subject to additional phasing or annexation.
 
______  4.  (a)  There are no special assessments pending.
 
______      (b)  No legal action is pending against the
condominium association, or its officers or directors.
 
______  5.  The common areas have been under the control of the
homeowners association for at least one year.
 
______  6.  At least 90 percent of the total units in the project
have been sold.  Verified by _________________________.
 
______  7.  At least 51 percent of the total units in the project
are owner-occupied.  Verified by ______________________.
 
______  8.  There are no adverse environmental factors affecting
the project as a whole or individual units .
 
______  9.  No single entity owns more than 10 percent of the
total units in the project.  Verified by ______________________.
 
______ 10.  The units in the project are owned in fee simple or
the units are held under a leasehold acceptable to FHA.
Leasehold in file.
 
______ 11.  The owners association has adequate common area
insurance coverage.  General liability, replacement coverage,
etc. reflects the character, amenities and risks of the
particular development.  Flood and other insurances carried, when
applicable.
 
______ 12.  General maintenance level of common elements is
acceptable and there is no deferred maintenance, based on the
comments by the Appraiser and/or the pictures.
 
______ 13.  The owners association has a reserve plan and a
reserve fund, separate from the operating account, that is
adequate to prevent deferred maintenance.  The amount of the fund
is $_________ as of __________.
 
                               -2-
 
_______14.  (a)  For projects consisting of over 30 units, no
more than 10 percent of the total units are encumbered by FHA
insured mortgages.  Verified by ___________________.
 
_______     (b)  For projects consisting of 30 units or less, no
more than 20 percent of the total units are encumbered by FHA
insured mortgages.  Verified by _______________.
 
____________________________________     ________________________
       (Mortgagee)                           (Reviewer)
____________________________________     ________________________
       (Address)ss)                             (Title)
____________________________________     ________________________
                                             (Date)
__________________________________        _______________________
  (Condominium Project Name)                 (FHA case number)
__________________________________
  (Address)
__________________________________

New Brooklyn condo seeks FHA approval

The Real Deal reported on another FHA condo coming on line in New York City. A buyer can get into this project w/ very little down and have carring costs below $2,000 a month. Feel free to e-mail me at rich@cpg-nyc.com if you would like more information about FHA condos in New York City.

552 Lafayette Street

At a new Brooklyn condominium slated to open Thursday, developers are hoping to obtain Federal Housing Administration approval to allow buyers to put 3.5 percent, or as little as $11,000, down as an initial payment. The five-story, 15-unit condo at 552 Lafayette Street between Bedford and Nostrand avenues, on the border of Bedford Stuyvesant and Clinton Hill, was developed by Offir Naim and Hung Tin Hung of KTR Construction, marking the duo's first Brooklyn project. There are 13 one-bedrooms and two, two-bedroom penthouses, with prices starting at $315,000. TRD