Some new rules scheduled to go into effect this fall on condominium loans insured by the Federal Housing Administration are discriminatory, bad for the environment, and could make affordable housing more difficult to build.

At least that’s how a couple of local developers see it.

FHA-backed loans have traditionally appealed to first-time homebuyers since they call for a 3.5 percent down payment versus the standard 20 percent required for conventional loans. One of the new restrictions spelled out by the Department of Housing and Urban Development in its Mortgagee Letter 2009-19 states that “no more than 30 percent of the total units” in a condominium project may be purchased with an FHA loan. FHA is part of HUD.

If a condominium project is FHA-approved, it means that prospective homebuyers are eligible to apply for such a loan.

According to Sherm Harmer, a principal of Urban Housing Partners, that rule discriminates against entry-level homeowners.

“The FHA was created for one reason, to help people into initial homeownership,” he said. “But now they’re attacking the one thing young people can afford. That’s contrary to what their mission should be.”

Urban Housing Partners is a real estate development firm that specializes in mixed-use urban condo projects.

Hard Sell

In his Aug. 13 blog, Steve Doyle, president of Brookfield Homes’ San Diego/Riverside Division, wrote: “Condominium homes are generally the first rung on the ladder to home ownership….My plea is for HUD to reconsider their position….Do not make affordable housing more difficult to build and sell.”

Another rule specifies that “at least 50 percent of the (condominium) units must be sold prior to endorsement of any (FHA) mortgage on a unit.”

Harmer said fulfilling that pre-sale requirement could mean prospective buyers would have to wait an interminable period in escrow, and that would slow down the absorption rate of newer projects.

Yet HUD allows developers to relegate sales to different phases, and in that case the sold-out percentages have to jibe with each phase.

Also a sticking point, Harmer said, is the rule that says no more than 10 percent of the units may be investor-owned. That also applies to developers and builders that subsequently rent out vacant and unsold units.