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FHA rule changes limit homebuyer options

Posted: December 11, 2011 1:30 a.m.
Updated: December 11, 2011 1:30 a.m.
Canyon Village condos on Crossglade Avenue in Canyon Country.  Canyon Village condos on Crossglade Avenue in Canyon Country.
Canyon Village condos on Crossglade Avenue in Canyon Country.

When the Federal Housing Administration, or FHA, changed the loan approval guidelines for condominiums two years ago, many of the condo complexes that once were FHA approved no longer qualify for eligibility — leaving Santa Clarita home sellers and homebuyers in the lurch, said Mike Meena of Augusta Financial, a mortgage broker based in Newhall.

“There are varying reasons why many of these complexes have not been re-approved,” Meena said.
FHA requires recertification every two years, but a series of revisions made in late 2009 were put in place to reduce the risk of losses from foreclosures or delinquencies.

The changes have prevented thousands of condo developments across the country from reapplying for, or obtaining, certification.

People all over the Santa Clarita Valley are extremely frustrated, said Brad Watson, managing director of Property Management Professionals. 

Watson’s firm manages homeowner associations for both single-family homes and condominium developments, and actively works with boards who want to have the recertification process handled for them.

“You don’t want to implement regulations that discourage people to buy,” Watson said.

Ironically, the FHA program was first developed to stimulate the housing market during the Great Depression by insuring mortgages against borrower default.

FHA-backed loans also allow buyers to make affordable 3.5 percent down payments on homes, unlike traditional loans that may require up to a 20 percent down payment.

But, in the recent recession, the agency moved to restrict access.

Some of the complexes have not sought to renew their eligibility due to lack of reserves, Meena said.

Others haven’t sought to reapply due to pending litigation, or because more than 15 percent of the owners are behind on their HOA dues, he said. All are restrictions imposed by the FHA.

HUD, U.S. Department of Housing and Urban Development, the department under which the FHA falls, said “No more than 15 percent of the total units can be more than 30 days past due with their association fee payments.” But industry experts say that is too small a window to define a payment as being late.

Also, the change in regulations also requires no more than 10 percent of the units in a complex may be owned by one investor.

One big change, said Christopher Sutton Jones, managing partner in the law offices of Christopher S. Jones & Associates, is that the FHA is eliminating “spot approvals,” which had been allowed since 1996.

Spot approvals allowed individual condominium owners to obtain FHA-insured loans even though the entire development had not yet been approved, he said. That is no longer allowed under the revised regulations.

The FHA also imposed a maximum limit of 30 percent of a condominium development’s units having FHA-insured mortgages in order to decrease the FHA’s exposure to risky projects, Jones said.

This rule was widely criticized and initially expanded to 50 percent until Dec. 31, 2010, he said, but the cap reverted back to 30 percent on Jan. 1, 2011.

The question is whether the revisions in regulations affect the real estate market for condominiums.

Markets mirror rules

FHA-backed loans allow buyers to make more affordable down payments on homes, unlike traditional loans which may require up to a 20 percent down payment.

FHA spokesman, Leman Wooley, confirmed that between December 2010 and Sept. 30 of this year, only 2,100 of the approximately 25,000 common-interest developments whose eligibility expired have been approved or re-certified. Wooley told the L.A. Times that just 8.4 percent of the condo complexes have been approved in 2011.

Meanwhile, median prices for condominiums in SCV fell 21.8 percent in October 2011 from a year ago, according to data released by the Southland Regional Association of Realtors.

In comparison, SCV single-family home prices only dropped 6.7 percent during that period and while condo sales have continued to drop, home sales have been steadily rising.

As the regulations limit the number of borrowers who can qualify for FHA loans, condo sellers are reducing prices to make conventional down payments more affordable, artificially dragging down the sales prices of condos and hurting all owners in a development.

“It’s a vicious circle,” Watson said.

Fannie Mae and Freddie Mac have no owner/occupancy ratio requirements, said Jeannette Way, a Northern California resident who served as chairwoman of the General Housing Committee for the National Association of Realtors. The FHA should have the same requirements to allow more buyers into the market.

“It would allow more condos to be purchased and wouldn’t be driving down the prices,” Way said.

Citing an example of the effect on real estate prices when condos lack FHA eligibility, Richard Szerman of Silver Creek Realty said the American Beauty Village condominium development on Soledad Canyon Road lost its FHA-backing in the mid-’90s, and prices fell more than 20 percent.

“When they got FHA (eligibility) back, the prices rose over 20 percent,” he said.

Describing a catch-22 scenario, Way said, without more units becoming FHA eligible the regulation is driving down the occupancy that, in turn, can make a development ineligible to reapply for certification.

If the FHA would ease up on its regulations, a common-interest development would be stabilized, creating a much better environment and stabilize the community, she said.

Bank-owned properties need to be eliminated from the occupancy count, as well, Way said.

Many of the properties in a development may be vacant because banks foreclosed on the condos, forcing homeowners out of the property. These actions decrease the occupancy ratios.

“Zero regulation got us into this problem, and over-regulation is keeping us in the problem,” Watson said.

“It’s stunting the market and unfairly stunting condo owners and hurting their investment.”

Heavy-handed penalties
Another reason condo developments have not sought to reinstate FHA eligibility, said Russell Hoffman, president and CEO of the Valencia Management Group, is the new rules put the association’s board members in the hot seat.

Hoffman’s firm manages both single-family homes and condominium developments.

Board members are required to certify they are complying with all local statutes and have no knowledge of any situations that could cause owners to become delinquent at some later date.

The regulation allows for a maximum fine of $1 million and 30 years in prison for knowingly making any false statements.

“They (board members) don’t want to put themselves in that position,” Hoffman said. “They don’t have any expertise; they’re not attorneys. They’re basically lay people.”

It really isn’t fair for volunteers to take on that kind of liability, he said.

Valencia Management Group and Property Management Professionals, both local companies, will assist homeowner associations who want to become re-certified. Valencia Management Group refers associations to a company that specializes in disclosing information for the sale or refinance of properties within a managed community, Hoffman said.

Property Management Professionals has a department that processes FHA applications on behalf of its association, and also provides the service a la carte to other associations.

“We have handled the application for two communities locally even though we don’t manage their community,” Watson said.

“As long as a board hires a reputable company to process the paperwork for FHA certification, they don’t need to worry about any liability associated with FHA approval,” he said.

Yet, Hoffman believes the stricter rules aren’t the only reason associations aren’t seeking FHA certification.

Capable homeowners

Associations are concerned about finding the most qualified buyers, Hoffman said. They want to know whether the homeowner can meet their obligations — pay the mortgage and homeowner association assessments and keep the property up to standards the HOA expects.

“We’ve only had one association that decided to go forward with their approval,” Hoffman said.

But Watson said the lack of FHA approval hurts the value of the condominiums and that free market principles should be the rule when it comes to a demand for real estate.

This practice could be considered a breach of the board’s fiduciary obligation to act in the best interest and for the benefit of the community as a whole,” Watson said. “Not to mention the potential for discrimination claims.”

By refusing to obtain FHA approval for their community today, associations may be using the change in regulations as artificial tools to deny FHA buyers, he said.

“Prior to the law change in 2009, when spot approvals were available, the association did not have the ability to deny

FHA buyers,” Watson said. They shouldn’t be able to deny FHA buyers today.
“FHA loans are much more common in the real estate market than they used to be,” Watson said. “People just don’t have the 20 percent cash to put down.”

Realty organizations across the country have faulted the FHA for making rules revisions that hurt the market.

Lack of transparency

The FHA showed a blatant lack of basic research before drafting the regulations, said Frank Rathbun with Community Associations Institute.

CAI believes many of the issues affecting the market today could have been avoided with greater transparency and collaboration on the part of FHA by working with industry experts.

“Not only has the agency failed to identify the most effective ways to achieve its own regulatory objectives,” Rathbun said. “Its mortgage-approval policies have created mounting confusion and frustration for condominium boards, homeowners, potential buyers and real estate agents nationwide.

“That’s unacceptable given the state of the housing market and the need for measures to stimulate a housing recovery.”

It’s no secret that officials in the government and agencies have said they would like to become less involved in the mortgage business — even threatening to pull the plug on Freddie Mac and Fannie Mae.

Unless, or until, the FHA makes changes that positively affect the sales of condos; however, this segment of the real estate market may continue to lag in recovery.

SCV condos
In a search of HUD’s list of FHA approved condominium developments in the SCV, The Signal found the majority of condo complexes with FHA certification have seen their certifications expire in the past year.

Local Realtors pulling data on FHA approved condominiums show very few complexes have applied for recertification as a result of the change in regulations.

In late November, Connor MacIvor with REMAX Realty in Santa Clarita, found no condo developments eligible for FHA financing in Castaic, Newhall, Stevenson Ranch or Santa Clarita. All had expired, he said.

Only some condominium condos in Friendly Valley had approvals, MacIvor said. Valencia had only three approved, Canyon Country two approved and Saugus had one approved.

FHA-approved buyers are going to have to look to single-family dwellings,” said MacIvor. “But there won’t be many, if any, in their approved price ranges.”

From Jan. 1, 2011 through Nov. 30, Alex Woltman with Intero Real Estate, reported that of the 840 condo and townhomes sold in Santa Clarita, only 27 percent of the sales involved FHA-backed loans.

Forty-five percent had to be financed through conventional loans, Woltman said. Twenty-six percent of the sales were cash transactions.

Most likely many of the cash transactions involved investors which would then increase the percent of investor-owned properties in any single development, possibly making the complex ineligible under the change rules.

Although legally associations do not have the responsibility to obtain FHA approval for their communities, associations have a vested interest in protecting the values in their community for all condo owners, ensuring the community is FHA approved, Watson said.

Condo owners should insist their associations do whatever is needed to make their developments FHA-eligible, Realtors said.

Without approval, the price just continues to fall and that hurts all of the owners in the entire complex, said Diane Kauzlarich with Triple D Realty in Santa Clarita.

“If you have two comparable complexes and one is FHA approved and the other is not, the one carrying the FHA approval will usually be priced 15 to 20 percent higher than the one that is not FHA approved,” Meena said.

“Many people think FHA loans are only for first-.time buyers, but they can also be for move up buyers.”

Homebuyers can find a list of FHA approved condos in their desired area by going to and entering the zip code of the area they’re shopping in.


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