The U.S. Department of Housing and Urban Development (HUD) issued a release which outlines upcoming changes designed to streamline the approval process for FHA financing for condominium projects.

Most notably, there is a provision stating, “Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100”, essentially lifting HUD’s long-standing policy of denying all condominium projects with a right of first refusal provision.

So, what does that mean to you, the consumer?  It means that more of the condo buildings that contained the right of first refusal clause in their bylaws, that were previously nearly impossible for a consumer to purchase using an FHA loan, will now be eligible for FHA loans.

The changes are set to be effective October 1, 2009.

You can read the entire release here.

There is a too-often ignored field in the MLS for condos which is abbreviated in the system as POO – percent owner occupied. In the current environment this number has become critical for buyers seeking mortgages since lenders see a low number – less than 70% – as a sign of trouble. In other words, a building with lots of POO is a good thing.

Unfortunately, as I alluded at the beginning, this field is rarely filled in by the listing agent. So, what happens? Buyer and seller enter into a condo sales contract and when buyer tries to get a mortgage the mortgage company balks and the buyer has to get another mortgage – except now mortgage rates have risen and the buyer’s cost goes up. Worse yet, the deal falls through.

The implications are clear for both buyers and sellers of condos. If you are buying a condo you have to know if you have enough POO before you pick your lender because, given your down payment, not all lenders will be willing to lend. According to Tom Fishwick of Guaranteed Rate, you will certainly have an easier time getting a mortgage on a low POO building if your down payment is at least 20% because then some lenders only require a limited review of the condo building and don’t even ask how much POO you have. “The reason you would have trouble getting a loan approved without 20% down is because the Mortgage insurance companies may not insure the loan. Lenders are willing to lend up to 90% but they require mortgage insurance and it is those guidelines that have been changing.” Curiously, an FHA loan, with only 3.5% down, will allow up to 49% renters in a building. Of course, you pay a higher effective total rate for an FHA loan.

If you are selling a condo in a low POO building then you better line up a lender who will be willing to finance the purchase and make sure any potential buyer can qualify for their program. Alternatively, you can sell your condo 3 times before a deal actually takes.

Just to give you an idea of how serious this problem can be consider Millenium Centre at 33 W. Ontario in Chicago. This building has some $1 MM + condos/townhomes in it. It also has 63% renters or 37% POO. (As a side note, this is an American Invsco building and they often actually assisted investors in buying and renting units in their buildings.) You have to wonder if the low POO is contributing to all the problems in that building. Aside from the fact that many lenders wouldn’t touch that building, I would personally be afraid to put a buyer there. Of course, I would be extremely cautious about any building in the South Loop. Just walking through some of them you can tell that they don’t have a lot of POO. And as I recently learned, even nice buildings in the West Loop might have too many renters for some lenders.

Are you thinking of buying a condo in a newly constructed building?  Plan to get an FHA loan for the purchase?  If so, you should beware that Fannie Mae has tightened credit for buyers of condominiums. You may recall from earlier posts that Fannie Mae is one of the largest players in the secondary mortgage market, the other is Freddie Mac.  Especially hard hit by the new rules are the condo buildings that are newly constructed.

Effective as of March 1, Fannie Mae:

• Will not guarantee mortgages in condo buildings where fewer than 70% of the units have sold (up from the previous number of 50%
• Will not back loans for sales in buildings where there are 15% of current owners delinquent on Homeowner Assessment fees
• Will not back loans where more than 10% of units in the building are owned by a single entity (generally the developer)

Starting in April, buyers without at least a 25% down payment will have to an additional   fee at closing equal to 0.75% of their loan regardless of their credit score. As of this writing, Freddie has not followed along with the increases….yet!

Well, it looks bad for sellers but good for buyers. Our recent check of months of supply of 2 – 3 bedroom condos in the city clearly highlights what we all instinctively know: there is a ton of inventory out there.

2008 was uniformly higher than 2007 and really shot up over the last 4 months, hitting highs above a 20 month supply. Although inventory pulled back in January like it always does, it’s still higher than 2008 at a 17 month supply.

Meanwhile, there is a clear upward trend in the days on the market for condos that sell, though it hasn’t really broken out of the 80 – 100 day average that has existed for the last 2 years.

There is really only one way for this glut to correct itself. Prices will come down. They are coming down.

You can always find our latest statistics on the Chicago market here and we also keep inventory and days on the market data at the neighborhood level:

• Edgewater
• Hyde Park
• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• Loop
• Near North Side
• Near South Side
• Near West Side
• North Center
• Rogers Park
• South Shore
• Uptown
• West Town

I knew it was bad and getting worse but as we updated our Chicago neighborhood housing market statistics I started to see deterioration on a scale I had not seen before. It used to be that the evidence of a slowdown was limited to the fringe areas of the city. Sacred neighborhoods like Lincoln Park and Lakeview seemed to be immune. However, that was not the case in November and December which saw home inventory levels (on a months of supply basis) rise to unprecedented levels throughout the city. So I decided to look at Chicago as a whole for the first time. The picture is not pretty.

We follow 2 – 3 bedroom condominiums in the city because they are such a large percentage of the housing stock. Although Chicago condo inventory has been on an upward trend for the entire year it seems to have really skyrocketed in the last 2 months as a result of plunging sales. Inventory levels are approaching 2 years of supply.

Meanwhile, there is a clear pattern of these condos taking longer to sell (the ones that did sell). After a brief spike in the spring of 2007, it was taking slightly longer than 80 days for condos to sell for about a year. However, there is a clear upward trend in the data over the last year and it is now taking more than 100 days for condos to sell in Chicago (again, those that do sell).

We have neighborhood level housing data at the following links. Be sure to check out Lincoln Park and Lakeview:

• Edgewater
• Hyde Park
• Lakeview
• Lincoln Park
• Lincoln Square
• Logan Square
• Near North Side
• Near South Side
• Near West Side
• North Center
• Rogers Park
• South Shore
• West Town

This may be stating the obvious but with inventory levels rising and mortgage rates coming down it looks like it’s going to be a great spring for buyers. Not so much for sellers, though the decline in mortgage rates should increase demand.