FHA Launches New Process for Condos

The Federal Housing Administration is implementing a new approval process for condominium projects. Effective as of Oct. 1, the FHA will allow lenders to determine project eligibility, review project documentation and certify that it is in compliance with Section 203(b) of the National Housing Act. Under the new rules, lenders will have two approval options for processing condo projects, either via the old HUD review and approval process or the new direct endorsement lender review and approval process, which is outlined in a 14-page mortgagee letter issued June 12. However, the direct processing option is available only "to lenders who have unconditional direct endorsement authority and staff with knowledge and expertise in reviewing and approving condominium projects." To be approved, the property must be created in full compliance with state law. Condo hotels, timeshares, houseboat and commercial projects are not eligible. The Mortgagee Letter gives particular relief to developers in Michigan, the only state in the country where single-family houses are built under a so-called "site condo" development law. Single-family site condos are encumbered by a declaration of condominium covenants or condominium form of ownership. About 90% of the state's houses are built as site condos, but under the Housing and Economic Recovery Act, the FHA could not insure mortgages on such units. Effective immediately, though, condo project approval is no longer required for site condos. "Without being able to offer FHA, we were out of business," says Michigan developer Stuart Michaelson of The Windmill Group.