You might recall last week’s post about new FHA guidelines, which could undermine the condo market.

A mortgage broker in Chicago, Illinois views these new FHA condo project approval rules as positive for Chicago.  He predicts an uptick in FHA condo financing after October 1st.  Check out his blog post.

Leif Swanson and I were talking about this over the weekend. Here in Phoenix, Arizona, we have a different opinion.  We’re seeing these new FHA condo approval rules as a death toll to condo sales:

1.  Many of the smaller condo projects cannot afford the estimated $10,000+ FHA project approval fee (it’s not worth it to them just to be nice and expand financing options for buyers) so they are not seeking FHA approval.  This is where Spot Approvals came in handy.  But after October 1st, no more spot approvals.  This means it is highly unlikely buyers can get FHA financing for smaller condo projects.  Under 100 units?  And how many of the larger projects can afford the application fee?  Or have the staff to fill out the application?

2.  There were a lot of condo conversions in the Phoenix area in the past 4 years.  Many of those did not sell out 100% so they are renting the remaining unsold units.  The new FHA guidelines will prevent these complexes from getting approval if more than 10% of the units are being leased.

3.  These same condo conversions were purchased mainly from investors.  This tips the balance toward rental units versus owner-occupied units, thus preventing FHA condo project approval.

4.  There are a lot of foreclosure & bank-owned condos in the Phoenix area.  That means HOA dues are not being paid.  The new FHA guidelines will prohibit approval of a condo complex if 15% of the units are behind in HOA payments.

5.  After October 1st, 2009, all condo projects (unless approved since October 1, 2008) must be approved from scratch.  This means the condo project’s HOA reserves and budget must be reviewed by an FHA employee.  How many condo projects are there across the country?  How long will that take?  Months?  Years?  In the meantime, buyers cannot use FHA financing until approval.  And then the condo project must re-apply for approval every two years henceforth.

There is little to get excited about these new regulations.