It was tough enough to sell condos in Phoenix in this market.  Now it just got darn near impossible:  [Thanks L!]

New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said.

The Federal Housing Administration rules, which took effect Oct. 1, prohibit any new FHA-backed loans on condo units in projects that include more than 25 percent commercial space.

In addition, no single investor – including the developer – may own more than 10 percent of the units in a particular project. That particular restriction alone creates a catch-22 from which condo builders most likely cannot escape, said mortgage originator Jill Hoogendyk of Wallick & Volk in Glendale.

Another rule that has sellers and brokers scratching their heads prohibits FHA loans in condo developments that aren’t "primarily residential," which could be taken to mean the FHA won’t guarantee loans in future mixed-use projects.

"I’m predicting that what we’ll see is whole condominium complexes sitting empty," Hoogendyk said.
 

So why is FHA willing to throw condos under the bus now?  Because, after nearly single handedly financing the recent "recovery" in the housing market, they’ve got problems of their own:

[W]e now are beginning to discover that the boomlet at the bottom of the housing market has been driven not just by the tax credit but by the government’s subprime lending program — FHA. The bailout is coming for that one and it’s not going to be small. In effect, the Congress and Obama administration [As well as the Bush administration before it.] have engineered their own little bubble in an attempt to buy political time and the bill is coming due quicker than they might have imagined. In many respects all they have truly accomplished is to ensure a steady supply of fresh foreclosures which will keep the market in a state of flux for much longer than it might have taken had it been left to its own devices.

For now, FHA is saying they won’t need a bailout, but they are scrambling to reduce risk.  So how serious a development is this for the Phoenix condo market?

The new restrictions won’t directly affect high-end, luxury condos that sell for more than the Federal Housing Administration’s roughly $350,000 lending limit, but Hoogendyk said FHA loans are by far the most commonly used loan among condo buyers. Without that option, buyers would have to obtain conventional loans, which are more expensive and difficult to qualify for, or they would have to pay cash.

Hoogendyk said the FHA rules amount to a death sentence for the Phoenix-area condo market, which had only been kept on life support by the continued availability of FHA loans.

Apparently condos have had nearly double the default rate of single-family residences even with the FHA financing.  What’s likely to happen to default rates now?