Break out the petards again...

Get your petards out, we may be about to hoisted to the yardarms again by new FHA rules that go into affect next month. Michigan is one of several states that allows a developer to build what we call "site condos" – single family houses on individual lots, but within a complex that is classified as a condominium, because of shared areas like roads or playgrounds or just the island at the entrance to the development. So, it looks just like a regular subdivision full of regular single-family houses; but, it’s not – it’s a condo complex, at least in the eyes of the FHA.

From a recent RealtyTrac article by Peter Miller comes these highlights of the new rules.

The FHA says that starting December 7th condos must meet several new standards:

• All projects not deemed to be used primarily as residential real estate are out.

• Because of noise worries, FHA insurance will be unavailable when properties are within 1,000 feet of a highway, freeway, or heavily traveled road; 3,000 feet of a railroad; one mile of an airport; or five miles of a military airfield. The FHA says that lenders “must avoid or mitigate” such conditions before completing their loan review process, but how does one avoid or mitigate an air force base? How much mitigation is enough mitigation? The obvious result is that with an abundance of caution lenders will be unable to finance properties with potential noise hazards.

• There will be no more FHA loans if the “property has an unobstructed view, or is located within 2,000 feet, of any facility handling or storing explosive or fire-prone materials.”

• Also, FHA loans are out if the property is located within 3,000 feet of a dump, landfill, or super-fund site.

• Not more than 25 percent of the property’s total floor area can be used for commercial purposes.

• No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units. For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100 percent complete; and only one unit can be conveyed to non-owner occupants.

• No more than 15 percent of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.

• At least 50 percent of the total units must be sold prior to endorsement of any mortgage on a unit. Valid presales include an executed sales agreement and evidence that a lender is willing to make the loan.

• At least 50 percent of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 percent of the number of presold units (the minimum presales requirement of 50 percent still applies).

• Projects in designated wetland and flood zones will not qualify for FHA insurance.

So, how will this impact us here in Michigan?

Well, unless there are exceptions made for our site condo designation or some process put in place for exceptions on a case-by-case basis, this could have a disastrous impact upon our market. Developers have been using the site condo development approach almost exclusively since the 1980’s, so most of our newer homes are actually site condos. There were sound economic reasons for developing this classification and for developers using it to build single-family homes.

However, think about the new neighborhoods that you may have visited lately. How many are near what could be classified as a “busy road” or how many are near a gas station or railroad or airport? And the wetlands rules may impact vast tracts of land in Michigan, which has extensive wetlands areas. Some of the new rules won’t have much impact in these neighborhoods, since few site-condo homes are usually rented out; however, the rule about the percentage of the complex that has been sold could prove to be a showstopper issue for stalled out or abandoned developments. Do you know anyone who bought one of those foreclosed homes in a stalled out development? They may be royally screwed by these new rules.

Every time that FHA puts out new rules there is uncertainty about how they might be interpreted and applied to our site-condos. It may well be that they have enough experience with that issue already to have a good and workable exception policy already in place. It may be that much of our housing stock just became uninsurable with an FHA loan guarantee. We just won’t know until we get some time and some test cases under our belts. Let’s hope we don’t need to use the petards again.