New lending rules for condominium buyers already are forcing some developers to change or to scrap plans for new projects for fear too many buyers will be shut out.
On Monday, the Federal Housing Administration started limiting the number of buyers in condo buildings that can get loans insured by the agency. The rules also put restrictions on buildings with poor finances, too many delinquent owners and a high number of rentals.
The tighter lending standards are designed to protect the financial health of the FHA. Roughly 18 percent of loans insured by the FHA are either delinquent or in foreclosure and the agency’s financial cushion has dipped below the federal minimum.
But the move is a blow to condo buyers because the FHA has become a key source of mortgage financing. The agency insures roughly one in four new loans today because buyers need to have only a 3.5 percent down payment.
“It is a huge debacle for us,” said Rene Oehlerking, marketing director for Salt Lake City developer Garbett Homes.
The company has canceled a 300-unit condo project, spending $300,000 to redesign it into free-standing homes. Most of the builders’ homes and condos this year went to buyers with FHA loans.
Garbett’s condo project didn’t pencil out with the new FHA rule that allows only half of a condo building’s units to have FHA-backed loans, with some exceptions. That number falls to 30 percent in 2011.
Another new rule requires at least 30 percent of units in new buildings be pre-sold before the agency insures any loans. That number will rise to 50 percent in 2011.
Government officials, however, say the rules are necessary to ensure consumers are purchasing units in viable buildings and to help ensure that defaults on condo projects don’t rise too high.
While the rules could be tough for builders, they will protect consumers because lenders will be forced to be more careful about which projects they fund, said Richard Vetstein, a real estate lawyer in Framingham, Mass.
“On the whole, it’s a good thing,” he said. “Financially sound condominiums make better investments.”