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Lending changes hit struggling condo market

POSTED: Friday, March 12, 2010 at 04:41 PM PT
BY: Melody Finnemore
Tags: , , , ,

Stacy Cooper, principal broker with Portland Condos, says changes in lending policies have made some properties virtually unsellable. (Dan Carter/DJC)

Unit No. 100, a completely suitable space at the Trillium Hollow condominiums in Northwest Portland, is up for grabs. Unfortunately, it seems to be completely unsellable, according to Stacy Cooper, principal broker with Portland Condos.

“I have had five buyers interested in writing on this property, and have run the loan package through 10 lenders. Only one is willing to loan, and they will require 40 percent down,” she said. “This was not the case three years ago when my sellers bought the property. It has appraised above the list price, but even fire-sale pricing won’t get this property sold.”

Cooper’s experience is shared by many Portland condo brokers in the wake of the Federal Housing Administration’s new lending requirements for such properties. The new guidelines are dealing a stiff blow to a sector that already is struggling because of the housing market collapse.

As of Oct. 1, 2009, condo developments must meet a stringent new set of guidelines in order to obtain financing through the FHA. The new approval process, part of the Housing and Economic Recovery Act of 2008, is intended to better insure mortgages and slow the rate of defaults.

However, the new guidelines also are slowing sales in an already sluggish market, said Tom Anderson, president and principal broker for The Excell Group.

“About a third of people use FHA loans, so you’re taking that equation out of the condo market,” he said. “There is still demand for condos, but a conventional loan requires a greater down payment and higher credit scores, so fewer people qualify. They want to buy, but they’re going to have to wait.”

Anderson’s listings include the Atwater Place condo tower in the South Waterfront District. Lenders took over Atwater Place and the nearby John Ross condos because of slow sales, and then held an auction for Atwater Place units last September to generate interest from buyers. A similar auction for the John Ross condos is scheduled for April 11. The new FHA guidelines undermine those efforts, Anderson said.

“There’s a lot of pent-up demand for these buildings, but they are just sitting there empty,” he said.

Along with loan requirements for buyers, the FHA guidelines include several new regulations for developers and investors as well. Among them, developers seeking FHA financing can no longer build within 1,000 feet of a highway, freeway or “heavily traveled road;” within 3,000 feet of a railroad; within a mile of an airport; or within 5 miles of a military airfield. Projects also may not be built on designated wetlands or within flood zones.

In addition, the FHA will not finance projects on property with an unobstructed view. Under the guidelines, condo sites can no longer be within 3,000 feet of a dump or a landfill, on a Superfund site, or on property with “hazards or adverse conditions,” such as high groundwater levels, unstable soils or earth fill.

“I understand that the spirit of the rule is to get infill in more pristine areas, but (under these guidelines) the whole South Waterfront would not have happened,” Anderson said.

FHA’s new guidelines also require projects to be at least 50 percent pre-sold before the agency will provide financing. That means there must be an executed sales agreement and evidence that a lender is willing to make the loan.

“This pre-sale thing is making a lot of buildings sit empty because they can be 30 or 40 percent occupied, but they can’t get FHA financing. So I think the Realtors would like them to lower that number,” he said.

Other requirements stipulate that projects must be deemed as primarily residential real estate; no more than 25 percent of a property’s total floor area can be used for commercial purposes; no more than 10 percent of a property’s units can be owned by one investor; no more than 15 percent of a property’s total units can be 30 days or more past due on condo association fees; and at least 50 percent of a property’s units must be owner-occupied or sold to owners who intend to occupy them.

Giles Rebholz, a mortgage consultant with MetLife Home Loans, said that while these permanent guidelines may not be good news for some, the temporary measures included in the guidelines might actually help stimulate the market.

For example, through the end of this year, the pre-sale requirement has been lowered to 30 percent. “It does do some good things to boost that low down-payment segment of the market,” Rebholz said.

In addition, FHA loans for the new construction of high rises are easier to obtain. The concentration of FHA loans available for new construction and conversions has been raised to 50 percent, and up to 100 percent on existing projects, as long as they meet specific criteria, Rebholz noted.

In the long run, the permanent measures benefit institutions like MetLife Home Loans because, as an FHA-approved lender, they give the institution greater control in the approval process, Rebholz said.

“It has actually gotten easier for some of the larger, national banks to get projects FHA approved, so it’s not all bad news. It just may change who people are working with, and that can be a good thing,” he said.

Under the new guidelines, MetLife can issue an approval within two or three weeks rather than the previous norm of six to eight weeks. The requirements don’t apply to detached condos, so those are much easier to approve. And a one-year wait on applying for loans for condo conversions no longer applies, Rebholz said.

However, others who deal in the market are concerned about the long-term negative impacts. With condos experiencing a 10-percent loss in value in 2008 and a 10.4-percent drop in 2009, Cooper said, the new guidelines may drive those losses even deeper this year.

“If we can’t get the financing back on track, that will continue, and I think, as an industry, we are in serious trouble,” she said.