10/21/11: New rules for FHA financing hold pitfalls for condominium officials
By Benny L. Kass
Condominium managers and boards of directors have a dilemma when it comes to the Federal Housing Administration. On the one hand, they know their unit owners want FHA financing to either refinance their existing mortgage or to help potential buyers secure loans. On the other hand, they recognize that recent FHA guidelines have put unreasonable requirements on condominium associations, including requiring them to certify certain facts, which, if wrong, could result in fines of up to $1 million and up to 30 years in prison.
In the past few years, the FHA has literally become the "main game in town" for condominium loans. The reason is because an FHA-insured loan generally requires a lower down payment than traditional loans in order to go to settlement. The Community Association Institute (CAI) - a national trade association representing condominium issues and communities - estimates that in 2010, between 30 and 40 percent of all condominium mortgages were FHA-insured.
But the FHA - as well as other organizations such as Fannie Mae and Freddie Mac - are mindful of the massive condominium foreclosures in some states, including California, Florida and Nevada. As a result, all agencies - especially the FHA - have tightened their rules to limit their own exposure to mortgages that fall into default.
On June 30, the FHA issued a policy guidance to mortgage lenders as to what requirements must be met in order to allow a loan to be insured by the agency. According to its Web site, the FHA "provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. . . FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner's default. Loans must meet certain requirements established by FHA to qualify for insurance."
For example, for existing condos more than one year old:
- No more than 50 percent of the total units can have FHA insurance. Under certain circumstances, this percentage can be higher.
- No more than 25 percent of the total floor area in the project (or in a unit) can be used for commercial purposes; however, exceptions can be requested on a case-by-case basis for another 10 percent increase in floor area.
- At least half of the total condo units must be owner-occupied or sold to owners who intend to occupy.
- No more than 15 percent of the total units can be more than 30 days past due on paying their condominium assessments.
Perhaps many associations can meet these requirements. But this is all new. Up until 2009, mortgage lenders were permitted to get "spot approvals." A spot approval would allow a lender to determine whether the specific condo unit meets the FHA requirement. But since too many associations were having financial trouble - often caused by only a few delinquent owners - spot approvals were discontinued. Now, the entire condominium project must qualify and be approved before any FHA loan can be made to a potential buyer or to a unit owner looking to refinance.
A new FHA requirement ensures that a condominium association must be certified, and must be recertified every two years, in order for its owners to qualify for an FHA-backed loan. Typically, this can be done by a member of the association board of directors, the property manager, the association's attorney, or a specialist who has experience and for a fee will handle the filing.
What must be certified? According to the FHA, the person signing the approval application certifies that (1) he or she has reviewed the project and it meets all state and local condominium laws and all FHA condominium approval requirements; (2) to the best of his/her knowledge and belief, the information contained in the application is true and correct; (3) he/she has no knowledge of circumstances that might have an adverse effect on the project, and - more significantly - (4) they are under a continuing obligation to inform the U.S. Department of Housing and Urban Development (HUD) if any material information is no longer true and correct.
And, as stated earlier, the penalty for making false statements is extremely harsh.
What should condo boards and managers do about the certification? According to Stephen Marcus, a Massachusetts community association attorney and a member of the CAI College of Community Association Attorneys, "non-lawyers should not provide the legal opinions required by FHA."
Marcus suggests that the certification process be divided up. Association attorneys should certify compliance with state and local laws; lenders, or the lenders' attorneys, should certify that the community complies with the FHA regulations.
Furthermore, how can anyone promise under oath to advise HUD immediately of any material information that is no longer factual? Board members do not often remain on the board indefinitely. And property managers also are not permanent fixtures. But if you signed such a certification and did not advise HUD if the facts changed, you could be facing criminal charges. For example, if one unit member loses his job and falls behind on paying the assessment, and the number of delinquencies exceeds 15 percent, will the certifier suddenly face 30 years in prison?
Bottom line: If you are a condominium property manager or a member of the association's board of directors, consult with your association's legal counsel before signing any certificates or affidavits for the FHA.
It's hard enough serving on the board; serving time in a federal penitentiary is probably worse.