Condo_Spot_Approvals

FHA will eliminate Spot Condominium

Approval on February 1, 2010.

There have been several delays and the new date has been extended from December 7, 2009

FHA Mortgagee Letter 2009-46B

New Rules for FHA Condominium Project Approval

Go into effect on December 7, 2009

The new rules can be read in FHA Mortgagee Letter 2009-46A

Spot Approval rules below apply until Febuary 1, 2010

The following requirements must be satisfied before a spot loan is endorsed:

(Reference FHA Mortgagee Letter 1996-41)

The condominium project must be complete. There should be no ongoing or anticipated addition of any units, common elements, and/or facilities.

Control of the common areas of the project must have been turned over to the unit owners association for at least one year.

The owners association must provide evidence that the project has the appropriate hazard, liability and flood insurance.

Individual units in the project must be owned in fee simple or be an eligible leasehold interest. The project's legal documents must provide for undivided ownership of common areas by unit owners. By virtue of this ownership, unit owners must have the right to use all facilities and unrestricted common elements.

The project's documents should not place any legal restrictions on conveyance. Any provisions that seek to limit the free transferability of title is generally unacceptable. Such restrictions include rights of first refusal and restrictive covenants. Certain governmental or nonprofit programs designed to assist in the purchase or rental of low-or moderate-income housing are exempted from the restrictions on conveyance provisions. The Department's policy on the free assumability and transferability of property is set forth in 24 CFR 234.66.

At least 90% of the units in the project must have been sold.

At least 51% of the units in the project must be owner-occupied.

No single entity may own more than 10% of the units in a project. "Entity" includes an individual partnership, corporation, limited liability company, limited liability partnership, joint venture, investor group or other natural or legal person qualified to hold an interest in real property. The 10% restriction does not apply when the ownership of less than three units would disqualify an otherwise eligible project.

The Department recognized that the 10% cap on the number of units that may secure FHA insured mortgages in a given project can place a small regime at a disadvantage, since only a few units will invoke the limit. Accordingly, a two-tiered system was established. For condominium projects having more than 30 units, no more than 10% of the units may have FHA insured loans at any given time. Condominium projects consisting of 30 units or less, can have up to 20% of the units encumbered by FHA insured mortgages under the spot loan rule.

Mortgage lenders underwriting spot loans must perform sufficient investigation and analysis to certify that the condominium project satisfies the eligibility criteria. Under

the regulations, mortgage lenders may employ a wide range of approaches to ascertain compliance with the spot loan requirements. Project developers, appraisers, owners, associations, management companies and real estate brokers are among the sources of information lenders may use. To the extent that the Department has information that can be of assistance, it will provide mortgagees with that information. However, it remains the lender's responsibility to ensure the accuracy of the information it relies upon in making its certification.

Attachment 1 is a suggested checklist lenders may wish to use in their underwriting analyses. It reflects some key considerations in assessing the eligibility of a project for spot loans.

The standard Direct Endorsement Underwriter Certifications applicable to condominiums under standard loan programs and the HECM program are not sufficient for spot loan applications. Some modification is needed. Accordingly, the following certification is added to the list of Direct Endorsement (DE) certifications in

Appendix 3 of Handbook 4000.4, Rev. 1, Ch. 1 and to the list of Underwriter Certification (HECM) in Appendix 3A of Mortgagee Letter 95-54. :

( ) The property is in a project that has not received prior approval by HUD but the requirements of 26 CFR 234.26(i) are met.

This certification requirement will be in effect for all mortgages executed on or after 30 days from the date of this Mortgagee Letter. A similar statement may be used until the requirement for a certification becomes effective.

Local HUD Offices and Regional Processing Centers will conduct random reviews of mortgage loans insured under the spot loan program. Mortgage Lenders demonstrating a pattern of abuse will be subject to those enforcement mechanisms and sanctions

governing FHA mortgage insurance activity.

The spot loan program is designed to relieve a burden on homebuyers in successfully-operating, non-approved condominium projects where FHA involvement is limited; it must not be used to circumvent the general requirement that a condominium project be approved before a mortgage on any unit in that project can be endorsed for insurance. As previously noted, the approval requirements for condominium projects are found in 24 CFR 234.26, (a)-(h). Additional requirements are set forth in Chapter 11, HUD Handbook 4150.1 Rev 1, entitled "Valuation Analysis for Home

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Mortgage Insurance" and reiterated in HUD Handbook 4265.1 ,entitled "Home Mortgage Insurance - Condominium Units - Section234(c)".

Questions regarding spot loans and condominium project approvals should be directed to the Single Family Division of the local HUD Office.

Sincerely yours,

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachment

SUGGESTED CHECK LIST FOR SPOT LOAN APPROVALS

_______ 1. The legal documents of the homeowners association do not contain a right of first refusal or restrictive covenant.

_______ 2. The unit is part of a condominium regime that provides for common and undivided ownership of common areas byunit owners.

_______ 3. The project, including the common elements, and those of any Master Association, are complete, and the project is not subject to additional phasing or annexation.

______ 4. (a) There are no special assessments pending.

______ (b) No legal action is pending against the condominium association, or its officers or directors.

______ 5. The common areas have been under the control of the homeowners association for at least one year.

______ 6. At least 90 percent of the total units in the project have been sold. Verified by _________________________.

______ 7. At least 51 percent of the total units in the project are owner-occupied. Verified by ______________________.

______ 8. There are no adverse environmental factors affecting the project as a whole or individual units .

______ 9. No single entity owns more than 10 percent of the total units in the project. Verified by ______________________.

______ 10. The units in the project are owned in fee simple or the units are held under a leasehold acceptable to FHA.Leasehold in file.

______ 11. The owners association has adequate common area insurance coverage. General liability, replacement coverage, etc. reflects the character, amenities and risks of the particular development. Flood and other insurances carried, when applicable.

______ 12. General maintenance level of common elements is acceptable and there is no deferred maintenance, based on the comments by the Appraiser and/or the pictures.

______ 13. The owners association has a reserve plan and a reserve fund, separate from the operating account, that is adequate to prevent deferred maintenance. The amount of the fund is $_________ as of __________.

_______14. (a) For projects consisting of over 30 units, no more than 10 percent of the total units are encumbered by FHA insured mortgages. Verified by ___________________.

_______ (b) For projects consisting of 30 units or less, no more than 20 percent of the total units are encumbered by FHA insured mortgages. Verified by _______________.

____________________________________ ________________________

(Mortgagee) (Reviewer)

____________________________________ ________________________

(Address) (Title)

____________________________________ ________________________

(Date)

__________________________________ _______________________

(Condominium Project Name) (FHA case number)

__________________________________

(Address)

__________________________________