Is a little-publicized switch in federal mortgage
policy causing huge problems for condominium sellers, buyers and
homeowner association boards across the country — even depressing
prices and blocking refinancings?
Condo industry leaders, from the 30,000-member
Community Associations Institute to individual unit owners and realty
agents, are emphatic that the answer is yes. They say a series of rule
revisions by the Federal Housing Administration has caused thousands of
condo projects to become ineligible for FHA mortgages. This, in turn,
has abruptly shut off loan money for would-be condo buyers and
refinancers, forcing them to pursue conventional bank loans requiring
much higher down payments — sometimes 20 percent and higher versus the
FHA’s 3.5 percent minimum — that they often cannot afford.
For its part, FHA says the rule changes it has
adopted, which focus on project budgets, insurance and financial
reserves, have been prudent and are designed to avert losses from
delinquencies and foreclosures. But the agency confirms that thousands
of condo projects have failed to obtain or apply for required
recertifications under the new rules. Out of approximately 25,000 condo
projects nationwide with expiration dates for FHA eligibility between
last December and Sept. 30 of this year, only 2,100 — just 8.4 percent
— have been approved or recertified by the agency, according to Lemar
Wooley, an agency spokesman.
“This has been a nightmare,” said Ryan
O’Quinn, a unit owner in a townhouse community in Calabasas, Calif.
O’Quinn, who is a member of the board of directors of the homeowners
association, has been trying to sell his condo since May. He has had
multiple offers and been in escrow four times — twice with the same
purchaser — but because the community’s eligibility has lapsed,
buyers who need FHA financing have been rejected by lenders.
In the meantime, O’Quinn has cut his asking
price several times for a total of $81,000 — a value decline that his
agent, Anna Nevares of Redfin, a realty brokerage, attributes directly
to FHA’s policy revisions. Not only did FHA fail to inform the condo
board about the changes, according to O’Quinn, but every time the
board submitted applications for recertification, they were rejected on
technical grounds. In one instance, he said, the agency turned down the
application solely because the reserve-fund bank account for the condo
project did not carry the words “reserve fund.”
In the Maryland suburbs outside Washington D.C.,
similar scenarios have been playing out. Nancy Reynolds, executive vice
president of Community Paperworks Inc., a consulting firm that assists
condo associations, says “there are entire Zip code areas where not
one condo can meet the new requirements.” Unit owners in such projects
find themselves unable to either refinance into today’s 4 percent
mortgage market or to sell.
Bernard Robinson, an owner of a unit in District
Heights, Md., says that because of delinquencies on homeowner
association payments in his development that exceed FHA’s limit, he
and his wife have not been able to refinance.
“We are qualified to refinance personally,” he
said in an interview, but because the development is not certified,
“our unit isn’t. We’ve exhausted all our options. They’re going
to force us to walk away.”
Critics say that FHA did not consult adequately
with the condo industry before changing its rules — a charge FHA
denies — and contend that the agency did not think through some of its
policies. Andrew Fortin, government affairs director of the Community
Associations Institute, says the rule that is hampering Robinson’s
refinancing — that no more than 15 percent of the unit owners in a
project be 30 days or more delinquent on their association dues — is
often impossible for volunteer boards of directors in large projects to
keep track of, much less to certify to FHA.
Even worse, according to other critics, the new
rules put board members into legal jeopardy by requiring them to sign
certifications attesting that the condo documents comply with all local
statutes and that they have no knowledge of situations that could cause
any unit owner to become delinquent at some later date. The mandatory
certification carries a maximum penalty of $1 million in fines and 30
years imprisonment if found to be incorrect. Large numbers of condo
boards have balked at this requirement, critics say, leading to the
drastic drop in certification requests and condo eligibility.
Bottom line for unit owners, sellers and buyers:
If an FHA loan figures in your plans, first check with the association
board. If the project isn’t certified, you are cut off — at least
for now — from some of the most favorable mortgage terms in the
marketplace.