Great news from FHA re condo rules

FHA announced that it is relaxing some of its condo rules to make condo loans easier to get.  This is huge and ought to improve affordability as well.  As it exists, condo complexes need to be approved by FHA in order for lenders to make FHA loans on them.  FHA loans differ from conventional loans in that the down payment and qualifying credit scores can be lower.  That makes these loans perfect for first-time buyers.  Here's the catch -- the approvals include lots of Byzantine rules and restrictions, and home owners associations have to pay to be FHA-approved.  This effectively cuts out many would-be buyers, who need to rely on FHA mortgages to get a mortgage at all.

Specifically, the new guidance extends certifications from two years to three, allows for single-unit mortgage approvals, provides more flexibility with owner/occupancy ratios, and increases the allowable number of FHA loans in a single project. The rule will go into effect in mid-October – 60 days from publication. HUD believes the changes will extend critical benefits to aspiring homeowners and confirm the agency is properly serving the public.

3 closings this week and how they went

The first property that closed this week was 1585 Knollwood Terrace in Pasadena (pictured above).  It had been listed at $1,049,000 and closed for $1,010,000 -- all cash (what recession?).  I loved this house and absolutely love the Linda Vista neighborhood that it's in -- old growth trees, nice architecture, open spaces, etc.  The house originally went into escrow right after being listed, but those buyers backed out -- it felt too remote to them.  The new buyer had seen it the first week it was listed and made the offer about a month ago. Cash? Sure!!!  Everything went well, although Pasadena requires a pain-in-the-ass city inspection and the interior chimney was shot. [An aside about chimneys: they are more trouble -- and way more expensive -- than they're worth for the 10 fires per year that we all build in them.]

The next house is 2112 Hilton in Burbank and I represented the buyers here.  The house is a "baby" Ben-Mar and closed at $549,000.  It was a flip, and the buyers had an FHA loan.  That means that the appraiser, in addition to the property inspector, goes over the property with a fine-tooth comb.  This house turned out to look good, but to have several structural issues, including asbestos, that the seller needed to correct before the loan funded.  It turned out to be a tooth-pull, but my clients were patient and the listing agent was a trooper.  The house backs up to a hill and has about a bajillion fruit trees.  This is great for Mr. Buyer as he studies horticulture.  Thanks to stalwart Dana Dukelow, our lender on this, for getting this done.

The final closing was at 10417 Chandler in North Hollywood/Toluca Woods.  You can spit to Burbank from this house.  It's a 2+1 that sold for $376k to my buyers and yes, it is that cute.  Everything when fine except the lender and the listing agent had several fights (I am always so glad when it's not me doing the fighting).  And, at the last minute, Mr. Buyer was called out of town on business.  Anybody who has purchased a home knows that the loan documents are voluminous and it's always good to be present with the lender or escrow officer so you know what you're signing.  But to make the closing deadline -- this was part of a three-property-chain deal -- all the documents had to be overnighted to Georgia and a notary had to be found there.  Mr. Buyer was a real trooper about this as was Mrs. Buyer.

The other great thing about these closings? I loved working with all three client sets.  Yes, that's unusual and yes, I'm really lucky, although I'm also really exhausted. 

Good news and bad news from L.A. Times

Yes, I'm back to being a clipping service.  First, the good news from the front page of today's L.A. Times: home prices in the Southland rose 4% in December.  And, most experts agree that even though the economy is soft, the worst is over for area housing.  I agree, as long as interest rates stay low.

Now for the bad news: restrictions on FHA loans have tightened.  A seller can no longer pay up to 6% of a buyer's closing costs -- the amount has been reduced to 3%.  Buyers will now need to come up with more cash at closing.  Required FICO scores have risen (actually, that's a good thing) and the upfront mortgage premium has risen to 2.25% of the loan.  It was 1.75%.  That will reduce the affordability of many FHA loans.

FHA changes to loans for condos

There's news on FHA loans for condos, and restrictions are even tighter than they were before. Yes, they will still guarantee purchase money loans, but with the following stipulations:
- The units have to be 51% owner occupied (that isn't new);
- No more than 15% of units can be more than 30 days' delinquent on dues;
- There needs to be "walls-in" insurance. This insures replacement of items like kitchen cabinets, bathroom fixtures, etc. Most condo insurance policies cover the walls to the studs, and that's it;
- there is a restriction on how many units may be FHA financed. This is sort of like "I don't want to join a club that would have people like me as members."
This is not all-inclusive, and I understand there's some case-by-case flexibility.

All sorts of funky new lending rules are about to take effect -- or not

Update 7/31/09: Apparently, what follows only applies to Wells Fargo home loans at present. Fannie Mae and Freddie Mac have instituted all sorts of new regulations for loans that they buy -- which is most property loans that are made. I don't have many details yet, and I don't think many lenders do either. For FHA loans, an investor-seller had to own the property for at least 90 days before an FHA buyer could purchase it. That makes sense -- we don't want the government guaranteeing loans that only benefit flippers. Now, however, it looks like the 90-day rule will cover ALL non-jumbo loans for all single family homes. I have a dog in this fight as one of my current escrows is a gorgeous flip that has only been owned by the present seller since June. I represent the buyers. Stay tuned for more details, I hope.

Questions from a recent transaction

Question 1: should non-profit, city government-funded housing entities sell houses that are unsafe?
Question 2: should non-profit, city government-funded housing entities sell houses to investor groups?

These questions have to do with a recent client transaction. Some names have been changed to protect the innocent (and me!).

My clients, Mr. and Mrs. Buyer, are approved for an FHA loan. We have been looking for a home for them since February. They found a home in Glendale that seemed to perfectly fit their needs.

The house was owned by Verdugo Housing Corporation, a non-profit organization that, I’m told, is chartered by the City of Glendale. I understand that Verdugo Housing was formed as a non-profit city partnership to increase affordable home ownership in Glendale.

Verdugo Housing had recently purchased the property for somewhere in the $200,000’s and had done a cosmetic rehab (carpet and paint). The home was for sale in the very high $400,000s and Mr. and Mrs. Buyer made a full-price offer just before it went on the market. Escrow was opened in April.

We repeatedly asked for legally-required physical inspection disclosures, but VHC never furnished them to us. And the house inspection did not go well. At all. (Recall that FHA will not fund loans on substandard houses.) The roof was crumbling. A couple of rooms that were added on were not attached to the foundation. The a/c and the stove didn’t work. The electrical work was substandard in places. Those were the major issues; there were many minor issues as well.
The buyers asked the sellers to fix the major issues; after all, a non-profit housing corporation would not want to sell substandard homes, right? To our surprise, the VHC declined to do so. My broken-hearted clients cancelled the escrow. We heard through the grapevine that the day after escrow was cancelled, Verdugo Housing Corporation sold the house on an all-cash deal to a group of local investors, who intend to rent it out.

Another week, another FHA issue.

Don't get me wrong; I love FHA. Without it, most buyers could not get loans. But it is certainly a new world. Two weeks ago, my clients fell out of escrow on a Burbank house they were purchasing because it would not appraise for the purchase price -- and FHA is very strict about the comparables used. This is a good thing, but was very disappointing for the buyers. Last week, some other buyer clients learned they had to pay FHA PMI up front at closing. Big, unpleasant surprise for us all. And now, another client couple has learned that the house they want to buy has a really bad roof -- rightfully, an FHA no-no. A good thing to know, but also a wrench in the works. Stay tuned.

If you are an FHA buyer and you are making an offer on a foreclosed property, the lender/owner of that property may never even see your offer.

Facts to know:

-As we all know, the government guarantees many loans through FHA.

-FHA puts some sensible restrictions, usually having to do with health and safety, on properties that it will back. For condo projects, restrictions have to do with HOA finances and ratio of renters to owners. Conventional lenders have the same restrictions on townhomes/condos.

-Right now, most of the buyer groups I am working with need to "go" FHA.

- There are "mega-lister" brokers out there who have hundreds of foreclosure listings.

-I had a great experience recently with a Realtor who has a normal amount of listings, some of which are foreclosures.

- Biggest fact: If you are an FHA buyer and you are making an offer on a foreclosed property, the lender/owner of that property may never even see your offer. Here's what happened to my clients this week in the form of an email string.

First, here's my email with names changed, of course: [Mega-Lister Realtor], on Sunday my clients wrote and we submitted an offer to you on [unit in large condo building in Burbank]. I had contacted your office on Friday and was told the property was available. My clients are Mr. and Mrs. _____. The offer was close to asking and was accompanied by financial information including a pre-approval. It is an FHA offer.

I phoned your office for status on Monday and spoke to [unlicensed assistant]. She told me another offer had already been submitted and that the townhouse complex was not FHA approved. She told me this was because there were too many renters in the complex. She also said that she could not submit the offer, because your company would get "in trouble" with the lender/seller for submitting an FHA offer on an un-approved complex... The mls says nothing about accepting or not accepting FHA offers.

I am very, very familiar with this complex and have been for years. It is extremely well maintained and I believe the HOA has very healthy reserves. I also find it hard to believe that it has less than 51% owner occupancy. I will check that in the next day with the HOA management company. I have also checked FHA's website, and the complex is not listed as approved or not approved. We've all been very educated about FHA requirements lately, and I know of no reason this unit/complex could not pass those.

I know this new market is a tough one for us all. But could you please guarantee and confirm that our offer has been submitted to the seller? It is a good offer and we need to know that the seller has seen it and responded.

Please phone me or email me with any questions or concerns. Thanks very much!

And here's the email that I got back from the mega-lister Realtor: I have reviewed the property prior to marketing and my recommendation is not to accept FHA offers based on the fact that it is not approved on huds website and the HOA verbally told us that there are only 45% owner occupied units. We don't have a condo cert yet however there is no sense in any of us getting into a deal that cannot be closed... I hope you understand.

Now, it probably sounds like I just have a case of sour grapes because my clients did not get the townhome. Well, okay. But, Realtors have a legal obligation to present all offers to their sellers. And Realtors should not be making the decision about what reasonable offers their clients should see. And Realtors also have an obligation to post on an mls listing if something is not eligible for FHA funding. And it seems to me that lenders who own bad assets and are getting bailed out with tax payer funds should be looking at everything.