Proposed changes to a federal mortgage loan program that now accounts for a substantial number of all new home loans have Hawai'i lenders concerned that many condominiums in the state could become ineligible for such lending.

The proposed changes stem from an effort by the U.S. Department of Housing and Urban Development to reduce fraud and risk in lending through the Federal Housing Administration.

The Mortgage Bankers Association of Hawaii fears that 545 Hawai'i condo projects will automatically lose their eligibility for FHA lending next year under revised rules proposed by the agency.

Elimination of so many condo projects from FHA lending eligibility could hurt the momentum of the state's housing market as it appears to be in an early recovery stage.

The FHA insures loans made by approved private lenders, which reduces lending risk and allows qualified borrowers — largely first-time-home buyers — to obtain loans with lower down payments and closing costs.

According to the national Mortgage Bankers Association, FHA's share of loan originations soared from about 3 percent three years ago to more than 30 percent after meltdowns in financial and housing markets devastated much of the mortgage lending industry.

FHA loans are available for single-family home and condo purchases. For condos, the loans are limited to projects that meet certain requirements, such as those with no less than 50 percent of units occupied by owners, no more than 15 percent of units delinquent on association fees and no more than 10 percent of units owned by one investor.

But in some cases these requirements haven't been reviewed after condos obtained initial FHA lending approval years or decades ago.

Under proposed rule changes, all condos automatically would be removed from FHA's approved lending list two years after a project was placed on the list. In Hawai'i, that would mean virtually every condo project on FHA's approved list, or 545 projects, would be removed.

Initially, the removal was slated to take effect Dec. 7 upon implementation of the new rules. However, recently the agency granted a grace period of one year before condos with old approvals will become ineligible for FHA loans unless they are reapproved.

Mark James, a board member of the local Mortgage Bankers Association, said the requirement to resubmit so many condos for FHA loan approval would create significant problems for buyers and sellers of units in the 545 projects.

The proposed rule impacts Hawai'i more heavily than other markets because condos represent a higher proportion of the local housing market compared with any other state, said James, branch manager with Mason-McDuffie Mortgage in Honolulu.

"The procedures (FHA officials) are suggesting are ridiculously onerous," he said. "We protested and got a one-year exemption to hang on to our 545 already approved FHA condominiums, but the new process for approving condos will make this process more difficult."

The Mortgage Bankers Association of Hawaii had asked that previously approved condos in the state remain on the FHA's approved list for two years to allow time for more orderly reapprovals.

Another proposed requirement from FHA is that lenders certify that they have no knowledge of any circumstance that might adversely affect the condo such as unit owner dissatisfaction with the condo owner's association.

FHA initially informed the mortgage industry in June about proposed revisions to its approval process, and has modified its proposal and delayed planned implementation dates a few times after industry feedback.