| Reprinted from: Condo Vultures® Opinion Column Thursday, 19 November 2009 09:47 |
The Federal Housing Administration recently released its new condominium lending guidelines, and with the stroke of a pen wiped 29 years worth of dust off of the most sought after lending certification in the country. The new guidelines include a major overhaul to the process by which lenders approve projects and modern requirements, increasing discretion in some areas while providing strong guidance in others. The changes were mandated in HERA Act of 2008 , which moved the statutory source of funding from a condominium only pool into the general housing pool. More importantly, FHA is using this guidelines change to simultaneously improve their standards and process, while eliminating cumbersome red tape that will reward condominiums in good standing that were previously locked out of the pool. The FHA was wise enough to issue temporary guidance simultaneously, allowing new buildings that qualify to sell out their remaining inventory in 2010 and support distressed markets in a responsible way. I believe that this FHA condo program renovation is a great first step in laying a long-term foundation for a recovery of the condominium housing markets. A quick backgrounder on the Department of Housing and Urban Development (HUD) could help clarify the workings of the FHA. The National Housing Act (NHA) of 1934 established the FHA to stem the tide of foreclosures during the Great Depression; prior to the NHA typical home loans were 5 year term loans (interest only) after which the entire principal balance was due in full. The FHA insured loans for up to 30 years, in essence creating the 30 year fixed rate mortgage - the standard loan issued today. The FHA's activities are spelled out (in detail) in the NHA and any activity it undertakes is authorized by that statute. The FHA's revisions are a concrete result of the HERA Act of 2008 enacted by the Democratic Congress and signed into law by President Bush. Back when Section 234 of the NHA was authorized, the condominium was still a novel new method of shared ownership, and Cooperative Housing Corporations were the mature way to distribute ownership in multi-family housing projects. Prior to HERA, the FHA issued condominium loans exclusively under Section 234 of the NHA and single family home loans under Section 203. This entailed different pools of funds, and when sold to investors, different pools of loans, some with condos, some with detached single-family homes. Once the new guidelines are fully implemented, this division will cease entirely, and the FHA will recognize condominiums in a formal way as legitimate single-family residences contained within a multi-family dwelling. The installation of a single approval standard, coupled with modern standards is a boon for all condominium owners. The Full and Spot system confused all parties as to the approval requirements for any particular project. Using the Spot Approval system, buyers had to pay for certifications each time a loan was to be issued, and go through the process as if it was the first time. Even worse, half the questions on the Spot checklist were boilerplate requirements which provided little useful underwriting information. The Full approval process contained major gray areas in important matters such as budgeting and insurance requirements, which had a chilling effect on applications due to the expense and complication applying. The most significant individual guidelines change was the allowance of the Right of First Refusal in condominium documents - so long as this Right does not conflict with the Fair Housing Act. The FHA’s rationale was that violations of the Act are criminal anyhow and many associations have the Right - while few are prosecuted for non-compliance. There are new caps on HOA dues delinquency percentages; however, the prior rules eliminated all buildings with special assessments under Spot Approval. The new Budget review guidelines adopt a Fannie Mae form which can now become the standard for lender communications in the area and only lead to more clarity for all parties. When it comes to matters of process, the removal of the legal certification requirements is quite possibly FHA's greatest slice into housing red tape since 1934. Under the prior rules, a condominium had to hire an attorney to review the Condominium Documents and certify to the FHA that they met a 37-page legal standard, which was drafted in December of 1980 during the waning days of the Carter Administration. Every time I encountered a building with fewer than 100 units and had to inform them that the certification costs alone would run $2,000, it pretty much killed their interest in FHA approval. However, that was after a 6 month-long search to find a practitioner willing to create a specialty in those types of reviews. Lastly, the FHA issued temporary guidelines, which are in effect for the coming year that should help local developers sell units to local buyers in South Florida with financing. Chief among these is the reduced pre-sales requirement in new projects which allows projects with 30 percent pre-sales to earn approval and sell up to 30 percent of their units to financed buyers with FHA loans. Two weeks ago, I visited the HUD Headquarters building on L'Enfant Plaza in Washington, DC to meet with their Condo Standards staff and learn the rationale behind their revisions and presented specific case studies of projects in our approval pipeline - as well as statistics generated by Condo Vultures®. The main topic of conversation was the stigma placed on loans into projects approved with Fannie Mae’s new process. The FHA wisely looked for guidance in the core logic of Fannie Mae's guidelines intended to protect the institutions that back these loans. However, Fannie’s initially stiff guidelines, rapid implementation with little input and then relaxation of the rules created the impression that the whole process was a sham. Now that there is discretion in the standards, the staffers were sensitive to the reality of the situation; that their decisions today will effectively pick winners and losers in the condo market. By issuing temporary rules alongside the new program, it sends a strong signal that the FHA understands the market, and that this is a process with real standards, but open to buildings experiencing temporary dislocations in this market. The FHA was originally created to backstop the national housing market and is visibly providing much needed support to the market, in a responsible fashion. FHA’s handling of the new shift from a rules based statutory condo approval process to a guidelines based process is providing much needed modernization to their programs and leadership to the market as a whole. The updates are modern, well considered and should promote condo lending, while simultaneously protecting the insurance pool from damaging claims in excess of premiums. The improvements to process should result more condominium approvals with lower costs to consumers as well as developers. It’s a credit to the Obama administration that his political appointees and career staff at HUD truly learned the lessons of Fannie Mae's disastrously erratic implementation of the condominium guidelines. These FHA condo updates will really gain traction in the 3rd and 4th quarters of 2010. For the buildings that qualify, they are the light at the end of the longest tunnel. |
Showing posts with label condo vultures. Show all posts
Showing posts with label condo vultures. Show all posts
Thursday, November 19, 2009
FHA remodels condo lending guidelines
Tuesday, October 20, 2009
Broken Condominiums
Reprinted from Condo Vultures® Opinion Column, April 20, 2009
I just found out that the high rise tower I call home has 40 foreclosures out of 195 units, and 60 units owned by investors who are likely just pushing their foreclosures out over the horizon.
With the distress blanketing such a large portion of the property, even the building's management is wondering if the condominium association will survive the storm.
Fortunately, this is still a very well run project where tenants are screened, security and utilities are paid, and somehow management has kept the lights on without interruption.
So how can you restore order when an association's membership abandons the condominium and it's residents? Is there a way to fix what shared ownership and shared antipathy has brought in the wake of the worst hard asset devaluation in generations?
My recommendation for value investors who want maximum profits for minimum input is to engage in the practice of Condominium Termination.
In several high rise towers, residents have reported the interruption of cable and internet services, rampant squatting, thefts and other misadventures related to non-payment of association dues in the property and lack of proper security.
Residents of the Mirrasou condominium in Northwest Miami-Dade lost access to the most basic of utilities, drinking water, as reported by the Miami Herald on April 16th, 2009. According to the report, the association has a delinquent bill of over $124,000. In the end, it took the direct intervention of a city commissioner to get the water flowing to this 304-unit condominium development.
When the water is shut off in a multifamily building, residents have to watch out for hazards such as infection from unsanitary relief, dry traps in sinks and toilets that create stenches, and the possibility of sudden condemnation of premises leading to emergency evacuations of owners and tenants alike.
During the peak of the great housing boom, dozens if not hundreds of developers hurled themselves into apartment house to condominium conversion projects. These groups operated like miniature private equity hedge funds, buying what were then mispriced commercial real estate assets and converting them for residential use and sale to individual owners.
The dollars and sense of these projects seemed obvious at the time, with condominium prices crossing $300 per square foot for even the lowliest of dwelling houses. And appetites seemed never ending.
Buyers lined up for the opportunity to buy a corner unit because it had much better value than an interior unit. These speculators, for the most part, have been removed from the scene, banks are taking huge losses - often times as a direct result of ignoring their own rules for occupancy and use in lending - and buildings that sold substantial amounts of units have become "fractured".
A "fractured" condominium does not have a functioning homeowner's association and comes in two major varieties. The more benign flavor is the "developer held association" where the majority of the units conveyed to tenants are in various states of delinquency and foreclosure. However, these developers have a large percentage of units, mostly occupied for rental. The "zombie association" is one where the units have been anywhere from 75-100 percent conveyed to individual buyers and more than 50 percent of the units are under water, in foreclosure or delinquent in dues.
The "developer held association" is a stable entity, that will likely survive the market's downturns as the developer typically has a substantial equity in the project and the rental units are producing surplus income, which pays for the delinquent units and often leaves a small residual income with the developer. These entities even reserve for improvements and the condominium property is in a high state of repair.
The "zombie association" is a different animal altogether, and one with a different solution that value investors should employ to not only make a profit, but help repair the open wound to the market caused by oversupply, over leverage and poor quality.
The worst associations were sold out between 2004 and early 2007 before banks discovered lending standards. They were and often sold quickly, remortgaged often and are now bereft of stakeholders entirely--outside of institutional first mortgagees and junior lien holders.
Condominium Termination can provide a faster, cheaper solution to the problems posed by 100-300 foreclosure filings, liens, utility company losses, lawsuits and judgments by creditors, tenants and owners.
Often times, dwellings subject to legal/financial distress are repossessed with major damage to the physical location, which renders them untenable and lowers demand for bank resale. Condominium complexes all have procedures drawn into their legal Declaration of Condominium which allows the Homeowner's Association to voluntarily disband the fee simple rights of the owners and revoke the subdivision of airspace that demarcates condominium boundaries.
Some projects require as little as 70 percent of unit owners and institutional mortgagees to disband; others demand that 95 percent of stakeholders are in agreement.
Condo Termination buyers should command a significant discount to be priced into the purchase of units. The goal is to buy as many units as possible at a high Direct Capitalization Rate, insure one's self against developer's liability (there is commercial insurance available for this) and then use the powers of the association to demand compliance or title from any parties who refuse to sell at the price that the majority accepts.
Once the association is terminated, all rights in the property typically revert to a tenancy in common, though this may be specified otherwise in the documents. At that time, the condominium entity and it's obligations can be terminated, leaving the building in the state of a commercial multi-family dwelling.
The irony is that while the market was booming, condominium units were valued at double and triple their income values (if one existed, many had "negative carry"), while commercial properties maintained pricing in line with income. Now the reverse is true, and condominium units are selling at a discount rate compared to commercial property--even when a condominium may throw off a steady income stream in relation to the sales price.
I just found out that the high rise tower I call home has 40 foreclosures out of 195 units, and 60 units owned by investors who are likely just pushing their foreclosures out over the horizon.
With the distress blanketing such a large portion of the property, even the building's management is wondering if the condominium association will survive the storm.
Fortunately, this is still a very well run project where tenants are screened, security and utilities are paid, and somehow management has kept the lights on without interruption.
So how can you restore order when an association's membership abandons the condominium and it's residents? Is there a way to fix what shared ownership and shared antipathy has brought in the wake of the worst hard asset devaluation in generations?
My recommendation for value investors who want maximum profits for minimum input is to engage in the practice of Condominium Termination.
In several high rise towers, residents have reported the interruption of cable and internet services, rampant squatting, thefts and other misadventures related to non-payment of association dues in the property and lack of proper security.
Residents of the Mirrasou condominium in Northwest Miami-Dade lost access to the most basic of utilities, drinking water, as reported by the Miami Herald on April 16th, 2009. According to the report, the association has a delinquent bill of over $124,000. In the end, it took the direct intervention of a city commissioner to get the water flowing to this 304-unit condominium development.
When the water is shut off in a multifamily building, residents have to watch out for hazards such as infection from unsanitary relief, dry traps in sinks and toilets that create stenches, and the possibility of sudden condemnation of premises leading to emergency evacuations of owners and tenants alike.
During the peak of the great housing boom, dozens if not hundreds of developers hurled themselves into apartment house to condominium conversion projects. These groups operated like miniature private equity hedge funds, buying what were then mispriced commercial real estate assets and converting them for residential use and sale to individual owners.
The dollars and sense of these projects seemed obvious at the time, with condominium prices crossing $300 per square foot for even the lowliest of dwelling houses. And appetites seemed never ending.
Buyers lined up for the opportunity to buy a corner unit because it had much better value than an interior unit. These speculators, for the most part, have been removed from the scene, banks are taking huge losses - often times as a direct result of ignoring their own rules for occupancy and use in lending - and buildings that sold substantial amounts of units have become "fractured".
A "fractured" condominium does not have a functioning homeowner's association and comes in two major varieties. The more benign flavor is the "developer held association" where the majority of the units conveyed to tenants are in various states of delinquency and foreclosure. However, these developers have a large percentage of units, mostly occupied for rental. The "zombie association" is one where the units have been anywhere from 75-100 percent conveyed to individual buyers and more than 50 percent of the units are under water, in foreclosure or delinquent in dues.
The "developer held association" is a stable entity, that will likely survive the market's downturns as the developer typically has a substantial equity in the project and the rental units are producing surplus income, which pays for the delinquent units and often leaves a small residual income with the developer. These entities even reserve for improvements and the condominium property is in a high state of repair.
The "zombie association" is a different animal altogether, and one with a different solution that value investors should employ to not only make a profit, but help repair the open wound to the market caused by oversupply, over leverage and poor quality.
The worst associations were sold out between 2004 and early 2007 before banks discovered lending standards. They were and often sold quickly, remortgaged often and are now bereft of stakeholders entirely--outside of institutional first mortgagees and junior lien holders.
Condominium Termination can provide a faster, cheaper solution to the problems posed by 100-300 foreclosure filings, liens, utility company losses, lawsuits and judgments by creditors, tenants and owners.
Often times, dwellings subject to legal/financial distress are repossessed with major damage to the physical location, which renders them untenable and lowers demand for bank resale. Condominium complexes all have procedures drawn into their legal Declaration of Condominium which allows the Homeowner's Association to voluntarily disband the fee simple rights of the owners and revoke the subdivision of airspace that demarcates condominium boundaries.
Some projects require as little as 70 percent of unit owners and institutional mortgagees to disband; others demand that 95 percent of stakeholders are in agreement.
Condo Termination buyers should command a significant discount to be priced into the purchase of units. The goal is to buy as many units as possible at a high Direct Capitalization Rate, insure one's self against developer's liability (there is commercial insurance available for this) and then use the powers of the association to demand compliance or title from any parties who refuse to sell at the price that the majority accepts.
Once the association is terminated, all rights in the property typically revert to a tenancy in common, though this may be specified otherwise in the documents. At that time, the condominium entity and it's obligations can be terminated, leaving the building in the state of a commercial multi-family dwelling.
The irony is that while the market was booming, condominium units were valued at double and triple their income values (if one existed, many had "negative carry"), while commercial properties maintained pricing in line with income. Now the reverse is true, and condominium units are selling at a discount rate compared to commercial property--even when a condominium may throw off a steady income stream in relation to the sales price.
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