Condo sales threatened by loss of FHA backing for loans

Article Courtesy of The Orlando Sentinel

By Mary Shanklin

Published November 10, 2011 


Orlando's condominium market, one of the hardest-hit in the country, faces further challenges because of federal policy changes that now limit mortgage financing for buyers seeking to purchase available units.

Of 68 condo complexes in the Orlando area, 44 have already lost a big part of their financial lifeblood: the mortgage-backing power of the Federal Housing Administration, which generates loans with some of the lowest down payments in the industry.

Another 12 complexes in Orlando are scheduled to lose their FHA approvals in the next six months.

In the past, most condominiums received open-ended approvals for FHA-backed mortgages, but the government changed that policy in 2009 and started limiting approvals to two-year terms. With those initial two-year approvals expiring this year, homeowner associations are now at a loss for how to get their condo complexes back on the federal mortgage-guarantee list.

"You've taken away a really viable purchasing tool at a time when the economy would really benefit from those buyers," said Fort Lauderdale lawyer Sandra Krumbein, who specializes in condominium law.

"Homeowner associations now have to get approvals [every two years], and that's what's causing the hoopla," she said. "The associations and their managers have no idea what to do to get approved."

Nationally, 25,000 condominium projects lost their FHA approvals from the U.S. Department of Housing and Urban Development during the first nine months of this year, and fewer than 10 percent of those have been reapproved or recertified. A condominium must have the approval before buyers can purchase its units with FHA mortgages.

Orlando real-estate agent Maria Garcia said she has represented buyers interested in purchasing condominiums who have had to look elsewhere because so few of the complexes locally are approved. And those that have approvals, such as the Vue at Lake Eola tower in downtown Orlando and condominiums in Baldwin Park, often have price tags and association fees that are too rich for first-time buyers, she said.

Faced with a limited pool of cash buyers, she added, most condominium complexes will see their prices slip further as a result.

"It's not a good outlook for condominiums," Garcia said. "The financing is pretty much the biggest issue. That's hindering the market the ability to get financing and the property will continue to depreciate."

A general lack of mortgage financing for condominiums has already taken a toll on prices. House prices have dropped, too, but not nearly as much as condo prices. In Orlando, the median condo price has fallen 64 percent since 2006, from $166,100 to $60,500 as of September. House prices, meanwhile, have fallen 52 percent during that time, from $262,900 to $125,200, according to Florida Realtors.

And while condo prices nationally dropped 18 percent from 2008 to 2010, they fell 57 percent in the Orlando area.

A HUD spokesman said the reason so few condominiums have found their way back onto the FHA mortgage-approval list is that some association boards may not, for whatever reason, want the federal green light for such mortgages. Also, some condo projects may be plagued with problems that prevent re-approval, such as having too many investor-owners or too few financial reserves.

Orlando mortgage broker Rob Nunziata, who sits on the boards of several condo and homeowner associations, said such boards are so busy dealing with day-to-day upkeep and financial issues that their members generally aren't focused on the importance of getting back on HUD's mortgage-approval list.

"Over the last couple of years, it's been very important especially with the first-time buyer who does not have the 20 [percent] to 30 percent down payment needed to get the Fannie Mae or Freddie Mac loan," said Nunziata, president of FBC Mortgage Inc. "It is extremely valuable and helpful if a condo is FHA-approved."

HUD issues the FHA stamp of approval for condominium complexes. In the past, the federal agency periodically recertified particular condominium projects, and it also had the power to pull a complex's FHA approval if it was having serious problems. But now condo complexes automatically lose their federal mortgage backing after two years, and their associations have to apply to get back on the federal list and attest that the development is free of any potential problems.

Even though the federal government does not charge condo associations to apply to get back on the FHA-financing list, association members may put themselves at risk of prison time and fines if they assert that a condo community has no problems involving legal issues, construction flaws or other disputes, some industry experts say.

As a result, associations are basically forced to hire lawyers or groups with FHA-approval experience, those experts say, and that expertise costs money.