On June 30, 2011, the Federal Housing Administration (FHA) issued Mortgagee Letter 2011-22, its long-awaited Condominium Project Approval and Processing Guidelines for condominiums seeking approval for FHA mortgages. The uproar voiced from association boards, community managers, attorneys and lenders when the Guidelines were released was immediate and considerable, and confusion and serious concerns with certain requirements reigned for over a year.
Today, the FHA issued Mortgagee Letter 2012-18, which puts in place several temporary project guideline changes in order to relax certain onerous requirements of Mortgagee Letter 2011-22, including delinquency rates, fidelity insurance coverage, limitations on commercial space, and, most notably, the required Project Certification. As stated in the new Mortgage Letter, the FHA “determined that certain policy adjustments were needed to address current housing market conditions.” These changes are effective immediately, and will apply until August 31, 2014, unless further extended or modified by the FHA.
Notable modifications and changes include:
- Delinquencies – No more than 15 percent of units may be more than 60 days delinquent (up from 30 days). The 15 percent limitation includes all units in the project (owner occupied, investor, bank owned or vacant), and the FHA will not consider any exceptions to this standard.
- Fidelity Insurance Coverage – If the condominium engages the services of a management company, the company must have obtained its own fidelity coverage that meets the FHA association coverage requirements or the association’s policy must name the management company as an insured, or the association’s policy must include an endorsement stating that management company employees subject to the direction and control of the association are covered by the policy. This is a substantial change to the previous requirements that required management companies to obtain separate fidelity insurance for each condominium.
- Commercial Space Limitations – The FHA will consider condominium projects with commercial space of between 25 and 35 percent; however, on a case-by-case basis (and with substantial documentation requests), exceptions will be considered for mixed-use condominiums with commercial space of up to 50 percent.
- Project Certification – The FHA made considerable changes to the previous Project Certification required to be executed as part of any condominium project submitted for approval. The new, less onerous certification must state that: (1) to the best of the signatory’s knowledge, the information in the approval request is accurate; (2) he or she has reviewed the project application and upon the advice given by an attorney it meets all State and local laws; (3) he or she has reviewed the application and it meets all current FHA condominium approval requirements; and (4) he or she has no knowledge of circumstances or conditions that may have an adverse impact on the condominium project (construction defects, substantial operational issues, or litigation, mediation, or arbitration issues).
To read the FHA’s Mortgagee Letter 2012-18 in full, click here.