Jackson Jambalaya

Will new underwriting guidelines by FHA, Fannie Mae, and Freddie Mac affect real estate development in the Jackson metro area? It's not a hypothetical question as Yahoo News reported FHA is tightening its underwriting guidelines for condos and mixed-use developments:
"The Federal Housing Administration is getting ready to implement new rules that could, in some cases, make it harder to get a mortgage to buy a condominium unit.
The new rules were supposed to take effect Oct. 1. But the FHA announced in mid-September that it would delay implementation of the new rules until Nov. 2, and that it might modify some of the policies.
Of the several new rules and requirements, there are four that most directly affect people who want to buy condos with FHA-insured mortgages:
* "Spot approvals" are eliminated, and now the entire project has to meet FHA approval before a borrower can get an FHA-insured loan.
* A maximum of 30 percent of the condo project's units can have FHA-insured mortgages (there was no such limitation previously).
* Before the FHA will insure a mortgage on a condo, at least half the units must have already been sold (again, there was no such limitation previously).
* At least half of the condo project's property owners will have to occupy their units, down from 51 percent..."

Unfortunately there are even more severe restrictions which could further crimp the sale of condos and apartments. FHA stated in Mortgagee Letter 2009-19 the following guidelines would take place October 1 (Now November 2, See section V of letter):
"No more than 25 percent of the property’s total floor area in a project can be used for commercial purposes. The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units."

"No more than 10 percent of the units may be owned by one investor. This will apply to developers/builders that subsequently rent vacant and unsold units."

FHA financing now accounts for nearly half of all mortgages underwritten. FHA requires less money down (3.5%) than do conventional loans but has a maximum loan limit of $271,000 in Mississippi. The appraisal process and credit score requirements are somewhat less stringent as well. While Fannie Mae issues mortgages up to $417,000, it requires higher credit scores and tightened its guidelines earlier this year. The Wall Street Journal reported in May:
"The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%....
Fannie and Freddie are both set to increase fees on condo buyers next month. Buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan, regardless of the borrower's credit score. The companies say these fees are necessary to protect against higher default rates....." article

Condo projects nationwide have burned lenders with much higher default rates and plummeting market values. These new guidelines will severely impact new mixed-used projects as developers will be faced with the twin prospect of overcoming the hurdles of the 25% mixed-use rule and 10% ownership limit. Prospective homebuyers can get a loan through local banks that can service the loans themselves, however, such loans usually carry higher down payment requirements, shorter terms, and higher credit scores.

The obvious question is whether the new regulations will affect projects such as the King Edward Hotel. Ben Allen, the President of Downtown Jackson Partners, told JJ most of the "downtown" projects should avoid the negative impact of the restrictions. Mr. Allen said projects such as the King Edward Hotel and Standard Life building used historical tax credits as part of their financing. In order to qualify for the tax credits, these mixed-used projects must rent out the residential units for seven years before they can sell them to qualified buyers. Mr. Allen said purely residential projects did not qualify for said tax credits. These projects and others such as Mandalay, the $35 million, 360 unit condominium development slated for the old Rapids on the Reservoir site, are probably going to find it more difficult to find qualified buyers after the new rules are implemented. While downtown will probably escape the latest credit ax, other projects in the Jackson area will probably not be so lucky.

Note: Article written by financial blogger "Mish" Shedlock on how the new rules are going to render condos in other markets worthless.