How The Obama Administration Will Kill the Housing Recovery in 5 Easy Steps.
This series of articles will focus on the incredible blunders the Obama Administration is making regarding housing. It is my prediction that we are about to fall off a second cliff with regards to foreclosures and the downward spiral of home values. My hope is that by highlighting these missteps they can be avoided. Time will tell if I am right or if I am an alarmist.
Step 1: FHA and condominiums blunder.
Condominium sales are a large part of the housing food chain. First timers often buy condominiums to start out. The seller of the condo is usually moving up to a house, the seller of that house often buys a bigger house, and so the food chain goes.
But what would happen if you completely eliminated condominiums as a segment of the housing industry? We are about to find out.
Currently, there are two basic forms of home loans. Conventional and FHA. If you want to buy a condominium with conventional financing you better have a large down payment. Why? Because if you want to put anything less than 20% down you have to have Private Mortgage Insurance, or PMI. PMI is basically an insurance policy that protects the lender, not the buyer. If the buyer walks away from the home the PMI company will reimburse the lender for it's losses. However, PMI is almost impossible to get these days. In fact, in some states it is no longer offered on condominiums!
The solution is FHA financing. FHA will allow loans with only 3 1/2% down. It is the ONLY low down payment program available for condominiums and is the program of choice for first time buyers, a huge demographic for condominiums.
So what is the problem?
FHA has always maintained a list of condominiums that are approved for FHA financing. A condominium project would jump through a few hoops, FHA inspected the complex and if everything was acceptable, the condominium complex was on the list. Once a complex got on that list it was pretty much permanent unless FHA got wind of a problem and withdrew it. Well, not anymore. Starting December 7th, 2009 ALL condominium complexes fall off that list and must go through a re-approval process and this time the guidelines are much more strict.
The new guidelines state:
1. No more than 15% of the units in a complex can be past due on HOA dues.
Many are already there or close to it.
2. The complex must have a reserve study within the last 12 months (the reserve study is for estimating how much money should be in the condo project's bank account for upcoming repairs, maintenance, etc.).
The vast majority of complexes do not have a current reserve study because they are very expensive and are only required every few years in the real world. In fact, some states don't even require them.
3. Here is the killer. Whatever that reserve study says the complex needs, the complex needs to be at least 60% funded. That means if their reserve study says they should have $200,000 in their reserves they better have at least $120,000 of it!
I called several prominent property management companies and they said that very few of the complexes they manage would meet this guideline at this time.
4. No more than 30% of the units in a complex can have an FHA loan on them.
FHA has decided that once 30% of the loans in a condominium complex are FHA they won't allow anymore FHA loans to be written in that complex! THAT will not take very long to reach, many complexes are nearly there!
What all this means is that, on December 7th, tens of thousands of condominium complexes, representing millions of individual condo units, will fall off the FHA approved list and will not be able to get re-approval. Goodbye food chain.
The entire concept of reviewing and re-certifying condominiums makes sense but why hold the complexes up to a financial spotlight in the middle of the worst financial crisis in 70 years? These projects have been hit just as hard financially as the rest of us and NOW we decide is the time to hold them up to the light? We are losing one of the most important loan programs at a time when the housing market is on life support.
This is one of five ways the Obama Administration will kill the housing market. Stay tuned for chapter two of "How the Obama Administration will kill the housing recovery in 5 easy steps".
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ABOUT THE AUTHOR
E.B. Larsen has been in the mortgage business for over 15 years. He has been been both a mortgage banker and a loan broker, eventually opening his own successful mortgage company. Eric feels his biggest contribution has been the creation of www.savingthehouse.org, the worlds only Foreclosure Prevention Program Generator. Eric realized that over recent months many government and private programs have been developed to lower people's house payments yet most homeowners don't know how to find them.
This site has done the work for the homeowners saving them weeks of research and phone calls. On this site homeowners answer 3 questions to learn:
* Which programs are available to them.
* Who to contact.
* What to expect.