Investors who own units in condominium projects could benefit if a push by the National Association of Realtors to change FHA funding rules proves successful.

In a letter to new FHA commissioner David Stevens, the association asked that FHA align its requirements on owner-occupancy in condominiums with those of Fannie Mae and Freddie Mac.

FHA recently adopted a series of amendments to its condo guidelines, one of which lowered the mandatory owner-occupancy ratio to 50 percent.

In other words, FHA previously would not insure mortgages on purchases of units located in projects that were more than half investor-owned or rental.

That cut off potential sales, and put some condo projects off limits for buyers who wanted to take advantage of FHA's low downpayment requirements.

Charles McMillan, president of the National Association of Realtors, told Stevens that FHA could make an even more significant improvement: Let loan applicants who plan to live in the condo units they purchase obtain mortgage insurance -- even if more than fifty percent of the units in the project are investor-owned or rental.

Fannie and Freddie already permit that, said McMillan. If FHA followed suit, that would "allow more buyers to purchase units in condominiums and help stabilize these developments and the community."

McMillan also asked Stevens, who previously headed Long and Foster Real Estate, one of the largest independent realty brokerages in the country, to change FHA rules on REO bank owned units in condos.

Under current rules, according to McMillan, FHA counts foreclosed REO units in projects as identical to investor-owned and rental units in terms of computing the owner-occupied/non-owner occupied ratio, even if the REO units are sitting empty and are not rented.

Excluding bank-owned REO from the occupancy ratio calculation "will help condominium developments with significant percentages of REO properties," said McMillan in his letter. "This change in policy will (also) align (FHA) with the policies of Fannie Mae and Freddie Mac."

McMillan also asked Stevens to lift the agency's co-called "concentration" requirement, prohibiting additional FHA loans to be made in condo projects where 30 percent of the units already have FHA-insured financing.

McMillan said condo units are often crucial for first purchases by younger, moderate income consumers, who look to FHA for low downpayment financing.

Stevens has not yet responded to the NAR letter, but if FHA makes the changes requested by McMillan, investors in dozens of projects could find the way cleared for them to sell units to purchasers who intend to occupy the units.

Published: August 14, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.