The Federal Housing Administration has finally done what it promised back in May: published revised rules that could convince condo associations across the country to get certified or re-certified for financing, thereby opening individual unit owners and sellers to low down payment, FHA-insured mortgages once again.
For condo boards, real estate agents and property managers, the long-awaited rule changes announced yesterday should prove to be "excellent news," that will "help spark home sales and help tens of thousands of condominium associations recover from the housing slump," according to the Community Associations Institute, the largest U.S. trade group in the field.
Among other changes, the rules eliminate some of the legal liability headaches that caused many condo boards to balk at FHA certifications; raise the permissible investor-ownership limit; and increase the percentage of non-residential, commercial use allowed in an FHA-certified project.
To Christopher Gardner, managing member of FHAProsLLC, a Los Angeles-based firm that assists condo boards with their applications for FHA certifications, the changes "aren’t a home run but maybe a double," but should still significantly reduce the impediments associations encountered in seeking FHA approvals.
Under federal rules, individual units in condo projects are not eligible for financing unless the entire project has passed FHA’s certification process, which looks at project budgets, reserves, forthcoming capital improvement needs, insurance policies, delinquent payments of association dues, composition of renters versus owner-occupants, and various other factors.
Industry experts welcomed the revisions to the certification form itself, which previously intimidated condo association officers because it appeared to ask them to accept broad legal liability on matters they couldn’t totally be certain about, such as disputes among tenants in the building, litigation filed with courts involving the condo project or board, compliance with local and state regulations and the like.
Though FHA attempted to reassure them that it would be rare that the government would seek the maximum penalties in cases of misinformation in applications for certification, those penalties nonetheless were daunting: up to $1 million in fines and 30 years in prison.
Now the certification form asks a single signer representing the association to attest that, to the signer’s knowledge and belief, the information in the application is accurate, has been reviewed by an attorney, and that the project complies with local and state regulations.
The signer also must warrant that he or she has no knowledge of circumstances that might have an adverse impact on the project, including construction defects, "operational issues," or legal problems. The federal penalties remain, but consultants such as Gardner say the revisions should alleviate "a lot of the fears" boards had with the previous language.
The rule changes published Thursday are "temporary" until FHA replaces them with formal, final regulations that would be preceded by proposed rules giving the industry additional opportunity to seek improvements. The new policies also represent the culmination of lengthy negotiations between FHA and industry groups, including NAR, CAI and consulting and management firms that started last spring.
At a conference held by the Northern Virginia Association of Realtors Thursday, acting FHA commissioner Carol J. Galante said the revisions show "that we listened" to the critiques from the industry, while still protecting the government’s insurance funds.
Under the previous rules, condo associations abandoned FHA in droves, even at significant costs to their own unit owners who suddenly had difficulty selling because FHA financing was no longer available to purchasers.
Only one out of 10 condo associations that would normally qualify for FHA financing currently is certified, according to Gardner, whose firm maintains a massive database of information on condos. HUD confirms that just 2,100 out of a possible 25,000 projects had obtained certifications or recertifications as of late last year.
The human costs of the previous rules were sometime extreme, Gardner says. In one case, an elderly woman who owned a unit in a non-certified community sought to obtain an FHA reverse mortgage in order to help pay the costs of her cancer treatments. The condo board said no — it didn’t want to run the certification gauntlet or take on the legal liabilities.
Among the key changes now in effect:
- The investor ownership limit in existing projects has been raised to 50 percent. Previously there was a 10 percent cap on the number of units owned by any single investment entity. Now the rule states that "any investor/entity (single or multiple owner entities) may own up to 50 percent of the total units…if at least 50 percent of the total units in the project" are owned or under contract for purchase by owner-occupants.
- The percentage of space used for commercial/non-residential purposes in a project is limited to 25 percent, but applicants can request exceptions up to 35 percent and even above in certain mixed-use developments that are still "primarily residential" in character and where the project is "free of adverse conditions to the occupants of the individual condominium units."
- Condo associations in which as many as 15 percent of unit owners are 60 days delinquent on their condo fees will now be eligible for certification. Under the previous rules, no more than 15 percent could be 30 days late. This was a major issue for many associations since they didn’t track 30-day delinquencies. Industry groups had sought a 90 day delinquency standard.
- Previous confusion over FHA requirements on fidelity bonds for management companies — with coverage that sometimes duplicated what was already maintained by the condo association itself — appears to be resolved. If the association’s fidelity bond policy names the management company as an insured or agent, it should pass muster.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.
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