5th & Main Condo Project loses crucial FHA backing

This article entitled “5th & Main loses crucial FHA backing” appeared in the Nashville Business Journal on August the 7th, 2009. The author is Jenny Burns:

“East Nashville’s 5th & Main condo project has lost its prime source of financing for its buyers – the latest snag for the troubled downtown project.

The U.S. Department of Housing and Urban Development rejected 5th & Main’s Federal Housing Administration approval and said no loans would be insured after June 10.

Developers say the rejection could stall the project because its condos, which start around $150,000, cater to entry-level buyers, who are increasingly looking to FHA loans for financing. FHA allows for a 3.5 percent downpayment – compared to conventional loans which can require more, often 20 percent.

The 5th & Main mid-rise fell into receivership in January. Sales contracts signed prior to that have fallen through, which led to the FHA denial, says attorney John Cheadle, receiver for the project, which is owned by Wachovia Bank. FHA rules require 51 percent of a project’s units to be under contract for buyers to qualify for the loans.

“It’s not a good thing, but it’s one that’s expected when you’ve got a low volume of sales,” Cheadle says.

If a condo project loses its FHA approval, it’s likely that potential buyers will also be unable to get loans from lenders that might sell to Fannie Mae. That limits “financing options for a non-warrantable condo that most lenders do not offer,” says Dianne Payne, production manager at the mortgage division of Magna Bank.

Payne says Magna is one of the few lenders that still offers portfolio financing, where a bank keeps a loan on its books rather than selling it. These portfolio loans typically require a 20 percent downpayment.

“There’s not as strong an appetite for the condo market. It definitely holds its own level of risk,” Payne says.

To remedy the problem, Cheadle says Wachovia and Bank of America are working together to come up with a portfolio loan product they can offer at 5th & Main. It would give buyers an option but would still require a higher downpayment than FHA loans.

Mark Deutschmann, owner of Village Real Estate, says he’s also working with Wachovia and Wells Fargo to get Fannie Mae approval. The government-sponsored Fannie Mae buys conventional loans but does not insure the mortgage for lenders like FHA does.

The modern, edgy design of the 5th & Main project was the brainchild of Nashville nonprofit Affordable Housing Resources, who originally developed the project to spur re-development in East Nashville.

Real estate agent Grant Hammond, who specializes in condos, says if Wachovia isn’t willing to extend loans on condos it now owns, “that is a rather large signal to me that the bank does not have very much confidence in the project.”

Until that happens, he’s advising his clients not to take the risk of buying a 5th & Main unit.

In the meantime, Cheadle says Village is offering lease/purchase agreements so potential buyers can move into their units now and close the sales when FHA financing is restored. That won’t happen until the project has sold 66 of its 129 units.

Five units were sold before the project fell into receivership. None have closed since.

But five sales are pending for buyers paying with cash, and 15 people have signed lease/purchase agreements, Deutschmann says. A recent 5th & Main lunch tour brought out 126 shoppers. The building’s units range from $149,900 to the $542,000 penthouse, and many units are selling at a 25 percent discount.

Deutschmann says he doesn’t know how long it will take to get the FHA approval reinstated, but the delay could affect those looking to apply for the $8,000 federal first-time buyers tax credit. A deal would need to be completed by Dec. 1 to be eligible for that credit.”

Obviously there are many potential outcomes with the 5th and Main project, but few paths lead to securing this project with a firm base from an investment prospective. One of the key issues that needs to be solved in addition to FHA insurability is the ability for a lender or bank to warehouse loans that do not require a 20 percent down payment. It remains to be seen if Wells Fargo or Wachovia have that want or even ability.