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FHA relaxes rules slowing condo sales

The Federal Housing Authority reversed restrictive rules that experts say hurt recovering real estat

Posted: September 30, 2012 2:00 a.m.
Updated: September 30, 2012 2:00 a.m.
Changes in the rules making condos eligible for FHA-backed loans should help the real estate market according to local experts. The American Beauty townhomes are featured in this photo from November 2011. Changes in the rules making condos eligible for FHA-backed loans should help the real estate market according to local experts. The American Beauty townhomes are featured in this photo from November 2011.
Changes in the rules making condos eligible for FHA-backed loans should help the real estate market according to local experts. The American Beauty townhomes are featured in this photo from November 2011.

The Federal Housing Authority recently backed off on some of the agency’s restrictive rules that experts said were hurting the real estate market’s recovery and hampering the selling and buying of condominiums.

After the nation’s housing crash, the U.S. Department of Housing and Urban Development and the Federal Housing Administration took a hard look at their financial exposure on FHA-backed home loans.

In 2009, the agency clamped down and required that some 25,000 condo projects nationwide become re-certified to make individual condos eligible for FHA-backed loans when put up for sale.

Without being eligible, buyers’ options were limited as the FHA-backed loans 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 those rules for condo complexes to become re-certified were deemed unreasonably restrictive by members of the Santa Clarita realty and loan industries.

Experts said many of the condo complexes that once were FHA-approved no longer qualified — leaving Santa Clarita home sellers and buyers in the lurch, dragging median price values down and hurting everyone including those living in the condo complexes.

But the recent easing up of the rules signals that the FHA believes there’s much less risk in prices depreciating much more, said Brad Watson, co-owner of Property Management Professionals.


In June 2012, under pressure from the Community Associations Institute, 69 members of Congress wrote a letter to the Secretary of HUD Shaun Donovan, stating the new rules were burdensome and asked for the rules to be revised with regards to delinquent assessment, association certifications, owner-occupancy ratios and the amount of commercial space allowed.

Effective Sept. 13, the rules were revised and experts said they hope the changes will help a market that has been crawling toward recovery.

While CAI officials hoped for this to come sooner, they believe the changes are a step in the right direction, according to Thomas Skiba, CEO. The organization said it will continue to press for reasonable condo policies to help communities recover from the housing slump.

“This is great news for the economy as a whole,” said Connor MacIvor with REMAX. “However, each condo or town-development will need to get approved again. We lost many certifications November of 2011 in the Santa Clarita cities.”

Late dues

Under new rules, no more than 15 percent of homeowner dues can be late, but the ceiling has been raised from 30 to 60 days.

Under the old rules, experts said 30 days was too small a window to even define a payment as being late.

Being so restrictive kept many homeowner associations from being re-certified as eligible for FHA-backed home loans, reducing the pool of eligible buyers.

The easing of the rules will help association’s that have struggled with delinquencies due to the economic downturn by opening up the market to more buyers.

New buyers will pick up the outstanding inventory and beginning paying assessments, so that the associations no longer have high delinquency numbers impacting their revenue and putting their association at risk, Watson said.

“At least this is more reasonable,” Watson said. “What happened before was you had these associations which were being impacted by the (economic) downturn. Then they were kicked when they were down.”


The FHA also revised the number of units that can be investor-owned from 10 to 50 percent.

Now one or more investors may own up to 50 percent of the total units — as long as at least half of the total units are owner-occupied.

Realtors had complained that the investor ratio was so low they couldn’t help sellers who had to relocate to secure jobs, or family members who needed to sell property of ailing or deceased relatives.

Earlier this year, Jeannette Way, a Northern California resident who served as chairwoman of the General Housing Committee for the National Association of Realtors described it as a catch-22 scenario, in which reducing the number of FHA-eligible condos was actually driving occupancy down.

Board penalties

The most onerous rule, however, was one that sent association board members — usually made up of homeowners who volunteered to serve — into hiding, out of fear from seeking re-certification for their condo development.

If, in the re-certification process, board members misstated information they were subject to personal penalties of $1 million fines and 30 years in prison.

While the penalties remain, the language in the rules has been toned down to be less heavy-handed signaling the real intent is to hold people accountable who intentionally commit fraud against the government — not the average homeowner who volunteers to serve on an association board.

“The old language was so strict that you could not really blame a volunteer of the HOA board for not wanting to sign off on various aspects of their association and placing liability on themself personally if something was not correct,” said Kathy Salisbury with Triple D Realty.

Now that the language has been lightened up, most board members will feel more comfortable relying on their associations’ lawyer or other professional to review the re-certification documents for accuracy, Salisbury said.

Stumbling blocks

The ability to secure spot approval for an FHA-backed loan on condo units was eliminated by Congress under the Housing and Economic Recovery Act signed into law July 30, 2008.

Lenders used to help with approvals on single units, but now the entire complex has to go through the process of getting approval or re-certified.

Spot approvals were eliminated because there was no real guarantee that an individual condo property itself was not at risk if the rest of the complex or physical structure was not up to FHA standards, said Nancy West, marketing and outreach specialist for FHA with the Santa Ana Homeownership Center.

“I think this is a case where the intent was good,” Watson said. “I just think there would have been other ways to go about confirming the fiscal health of the association rather than taking such a drastic step to basically ended all FHA approvals.”

But if the FHA were to allow spot approvals again, there will be many more happy FHA buyers, MacIvor said. FHA buyers make up a majority of home buyers who currently cannot afford single-family residences and would buy a condo or town home in a heartbeat if they were FHA approved, he said.

Also, the reserve studies that are required are a real problem, said Mike Meena of Augusta Financial.

A complex needs to ensure it has enough reserves to make repairs to a complex in a specified timeline, but given the market conditions and number of foreclosures in the past several years many homeowner associations are low on funds and as a result can’t meet the requirement.

“The HOA’s are getting healthier now, but they are still way behind,” Meena said. “They need to give a little so we can get the properties sold and eventually the properties will be healthy again.”

If the condominium market begins to recover, he said, people can sell their units who want to move up to houses and it will help the economy.

Still, some homeowner associations stand in the way of creating a healthy market.


Many local association complexes, however, don’t understand that qualifying their complex for FHA financing will mean an increase in owner-occupied units and fewer renters, Salisbury said.

“You get a decline in prices in a heavily tenant-occupied complex due to lack of affordable financing,” she said. “FHA financing would tremendously help the condo and townhome market and you would begin to see recovery within those complexes with true pride of ownership from owner-occupants.”

FHA financing can be very valuable financing for the future of a complex, Salisbury said. It means an affordable down payment because with today’s prices, few people have 20 percent or more as a down payment and the money for closing costs, she said. And, more qualified buyers’ means more association fees being paid.

“There’s more liability in not getting eligibility certification,” Watson said. “If an association restricts buyers in anyway, it’s disenfranchising a lot of buyers at a time when we’re trying to work on our recovery and the community complex itself.”

HUD takes a dim view on anything viewed as discriminatory housing practices. Not seeking FHA certification intentionally to control the kind of buyers who can afford to move into a complex would be one example, and in an earlier interview a spokesman for the agency said it would pursue any party found guilty of the practice.

To get FHA approval on behalf of their community is a win-win for the association, for homeowners who want to sell and for qualified buyers seeking affordable down payments, Watson said. It opens up the market and makes sure the inventories kept within reason. It helps the recovery.

Santa Clarita Valley home sale inventories, as reported by the Southland Regional Association of Realtors, have been at an all time low — pegged way below a healthy market level of inventory.

“The FHA was very lenient on their condo approvals in the past and now they are the most difficult when it comes to condo projects,” Meena said. “What the FHA needs to do is make the lending requirements easier.”

While changes the FHA did make have been applauded by experts, the letter issued by HUD does note that unless further extended by the FHA, the changes only take effect until Aug. 21, 2014.

CAI is urging the agency to provide long-term relief.



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