Part 5-Final FHA Updates to Condominium Approval Qualification Requirements and Process

Written By: Stacey Sprain, Op-Ed Writer

Mortgagee Letter 2011-22 dated 6/30/2011 clarifies, expands, consolidates, and updates existing condominium approval guidance while also replacing Mortgagee Letters 2009-46b, 2009-46a and 2011-03. Included with the new Mortgagee Letter are an attached Condominium Approval Implementation Schedule and 95 page Condominium Project Approval & Processing Guide. The revisions listed in this newest Mortgagee Letter are effective starting 08/31/2011.

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Because of the length of content included within the Mortgagee Letter and attachments, this article has been presented in multiple parts. This is Part 5, and the final of an ongoing weekly analysis of the content of FHA’s recent condominium updates.

Let me start this week by saying this: It’s taken me a full month to sort through the content of HUD’s 95 page Condominium Project Approval & Processing Guide and I finally got to the end of it. I’d challenged myself to take the information in the Guide and reorganize it in a format that the average loan officer, processor and underwriter can understand. There were moments I had to get up and walk away from my desk to take a breather, regain my focus, and come back to it so I could continue with it. I was challenged with constant frustration because many pieces of information are repeated throughout the Guide and topics jump around quite a bit. By no means was it easy to read through and make sense of. I fear that HUD’s attempt to make condominium processing and project reviewing easier has only made things even worse.

What frustrates me most about these condominium approval requirements for FHA is the position it puts us in as lenders. We become the middle men between the property seller, the property buyer, the realtor(s), the homeowners association or builder or Management Company. Though it mentions in numerous places within the Guide that condominium packages should be submitted by the builder; developer; homeowner’s association (HOA); management company (MC); project consultant or attorney acting as an agent for the developer/builder, we all know who typically ends up submitting these packages- it’s usually us as the lender because we end up with a purchase transaction on our desk for a borrower who is trying to use FHA financing for a condominium unit in the project whose approval has expired or for a project that has never been approved by FHA. Then the pressure mounts. We have to scramble to coach the builder, HOA or other party representing the condominium project on what we need. Then we have to gather and stack the package, stop to try and make sure we can tell it at least meets minimum criteria and then we end up submitting the package to HUD for review and approval because so few lenders offer DELRAP (more on that later in this article). Then we have to deal with the calls from the sellers, buyers, realtors all wanting to know status because it’s holding up their deal. The frustration mounts between all parties and our reputation as the lender is on the line because we can’t get any answers from HUD on status and then when we do get some sort of communication, it’s in the form of piece mail. HUD will communicate that they need something that’s missing. We get it, we send it in. Then we wait. We field more calls from the other parties whose anger continues mounting. We make more follow up phone calls to HUD and we wait. We finally hear back from HUD and now they want something else that they could’ve asked for the first time. And the process continues for an average of 6-8 weeks I’m told recently until a decision is finally rendered and posted. However, usually by this time, we’ve had no choice but to scramble to figure out other financing alternatives to save the deal from falling apart.

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I actually heard this morning that there are lenders out there who have specifically instructed their originators not accept loan applications for condominiums if their borrowers need FHA financing. As bad as that sounds, I can totally understand why it’s been done! It’s become far too difficult to offer FHA financing for condominium properties! It’s not worth the hassle for lenders! And though I’m sure HUD’s answer would be that is the reason they offer the DELRAP alternative, can anyone name 5 lenders who are offering DELRAP off the top of your head? I sure can’t! And again, I can completely understand why lenders aren’t willing to offer DELRAP. The risk is extremely high and quite frankly, it’s a very costly endeavor that many lenders simply cannot afford to invest in given the current market conditions. How many lenders can find or afford to employ and designate a department full of individuals who are experts on reviewing condominium projects in all areas of the country? How many lenders have the systems and technology that can effectively handle incoming condominium submission packages? How many lenders are able to take on the risks associated with making a mistake or missing a detail on a project review that could result in uninsured loans or worse?

Here is something I’d like every person who is reading this article to do so I can make an important point. I promise it will be worth the minute of your time. Go to this website:

• Choose HRAP/DELRAP for the first dropdown box
• Choose to sort by State in the second dropdown box.
• Choose your actual state of residence from the state list in the third dropdown box.
• Leave the next four boxes blank (choose no dropdown selections)
• Choose All for status in the eighth field.
• Select both for the Search Type in the ninth field.
• Scroll to the bottom of the page and click Send.

This will bring up a list of statuses condominium projects for your particular state. Now scroll through that list and pay particular attention to two columns in particular:

• Column #4 reflects whether the project has been reviewed by HUD for HRAP or by a DELRAP lender. (notice the ratio of DELRAP versus HRAP listings in that column)
• Column # 12- the last column, indicated each project’s expiration date. (Note how many projects are near expired or currently expired).

A review of those two columns allows us to conclude three things:

1. Few lenders are taking on the risks associated with DELRAP condominium project reviews. Majority of projects are being submitted to the HUD Homeownership Centers for review and approval; and

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2. A large number of expired or near expired condominium project statuses could significantly impact the number of immediate FHA loans that can be done for those projects in your area; and

3. It’s evident based on the large number of expired projects that HOAs and other parties are either not aware of the need to maintain condominium project approval status with HUD or that they are less likely willing to deal with the hassle in order for buyers to utilize FHA financing for unit purchases in their projects.

The bottom line? FHA condominium project review and approval requirements are far too complicated and cumbersome, even with HUD’s newest release of Mortgagee Letter 2011-22 and the new 95 page Condominium Project Approval & Processing Guide. Lenders simply do not have the resources and are not able to or willing to assume the risks associated with pretending to be condominium project review and approval experts. HUD needs to further simplify the processes, make it easier to get immediate answers to condo-related questions, needs to create a better system to keep submitters updated on package statuses and review of conditions, and needs to do a much more thorough job of educating the public about the necessity for condominium projects to obtain and maintain FHA condominium approval. It shouldn’t fall on us lenders to play middle men.

About The Author

Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. 

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.