On September 27, 2016, the Federal Housing Administration (FHA) proposed new regulations governing the condominium project approval process. These proposed regulations seek to address issues created by certain onerous requirements of Mortgage Letter 2011-22 as well as to respond to the changing conditions in the condominium market.
The notable proposed regulations include:
- Minimum Owner-Occupancy Requirements – FHA currently requires a minimum of fifty (50) percent of the units occupied by owners. FHA is specifically inviting comment on this issue and is proposing to establish an allowable range of owner-occupancy between twenty-five (25) and seventy-five (75) percent. The range would allow FHA to choose a specific percentage that is responsive to future market changes.
- Commercial / Nonresidential Space Limits – FHA currently requires that commercial/nonresidential space not exceed fifty (50) percent of the project’s total floor area. However, FHA is specifically inviting comment on this issue and is proposing to establish an allowable range between twenty-five (25) and sixty (60) percent, which would giving FHA flexibility to make any needed future adjustment within this range.
- Single-Unit (“Spot”) Approvals – Under certain circumstances, FHA is proposing to bring back single-unit / “spot” approvals for selected condominium units in developments that are not currently FHA approved. An individual unit may be eligible for Single-Unit Approval if: (1) the condominium is not on the list of FHA-approved 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; (2) the individual unit is located in a completed project that has not yet been approved; (3) the unit is not a manufactured housing condominium project and is in a project that has at least five dwelling units; and (4) the unit is in a project in which the amount of single-unit approvals is limited to a maximum of twenty (20) percent of the total number of units in the project, which may be reduced to as low as zero (0) percent via subsequent notice.
- Condominium Project Approval Eligibility – Under this proposed rule, FHA and participating lenders will not approve proposed or under construction projects; however, projects may be approved in phases or upon completion. Condominium projects approved under this rule would be those where the work on the project or phase, including buildings and infrastructure of the project or phase, is fully complete.
Again, these are just proposed regulations, but FHA has stated that its intent is to modify its condominium rules to ensure financial soundness and project viability, but in a manner that is more flexible where possible and responsive to the market. In the meantime, FHA is seeking comment on any or all of these proposed regulations. We will advise when and if these proposed regulations are adopted and effective.
To read the FHA’s proposed rule in full, click here.