Blog posting by David Swedelson, California HOA and Condo Lawyer and Legal Expert
Interesting article and perspective regarding the Federal Housing Administration’s (FHA’s) new guidelines for condominium loan offers from fellow community association attorney Stephan Marcus (Massachusetts).
Steve notes that “the FHA published the first iteration of this guidance in June 2009, with little, if any, input from the community association industry. The FHA’s new Guidelines, unveiled in late June 2011, indicate that FHA officials listened to the concerns expressed by the Community Associations Institute (CAI) and others, and responded to at least some of them. Apparently CAI is challenging the latest guidelines arguing that FHA violated both the Administrative Procedures Act and its own rule-making procedures by failing to consult affected industries and interest groups.”
The new FHA Guidelines are available at this link.
Steve states that although improved in some areas, the revised guidelines are still problematic and believes that in some cases, they are even more problematic than before.
Steve notes that that the guidelines detail “the requirements community associations must meet in order for owners and prospective buyers to qualify for FHA-insured mortgages. FHA certification has become more important for community associations since the financial meltdown, because the FHA has assumed a much larger role in the home finance market, now insuring an estimated 30 percent of residential mortgages originated or refinanced today.”
Steve believes that the requirements outlined in the new FHA guidelines complicate the certification process “and may discourage some communities from undertaking it.” We agree!
Among the list of most serious problems and/or potential problems:
• An expanded, and apparently open-ended requirement that association representatives guarantee a community’s financial viability and marketability;
• A more detailed but ill-defined review of association finances;
• A new fidelity bond requirement for management companies;
• A revised formula for calculating delinquent common area payments; and • New documentation and insurance requirements for gut rehab conversions.
Steve points out that the new insurance provision, requiring management companies to obtain fidelity bonds for their employees, demonstrates that the FHA doesn’t really understand condominiums. “Not only would this coverage be difficult to find and expensive, it would also be duplicative. Most communities already have fidelity insurance policies that cover malfeasance by managers, which many states, including Massachusetts, require. Bonding management company employees, as the FHA now requires, won’t increase the protection associations already have, but it will add significantly to the cost.”
Steve believes that the new delinquency formula is similarly misguided. “The FHA has revised the 2009 guidance, which established a firm 15 percent delinquency cap, by adding waiver conditions that will enable many communities exceeding the cap to obtain certification anyway – a much-appreciated change. But what the FHA has given with one hand, it is taking back and more with another by now including units on which lenders have foreclosed in the delinquency calculation.” Why is this an issue? As most of us have learned, lenders holding foreclosed units are notorious for not making timely payments of assessments or fees.
Steve points out another problematic issue; who at the association will sign the FHA’s certification? “The [FHA] wants the association’s board, manager or “authorized representative” to affirm that the community complies with “all state and local condominium laws and all FHA condominium approval requirements” and to attest further that they know of no “circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent.”
And what are the adverse conditions? Construction defects and “substantial disputes or dissatisfaction among unit owners about the operation of the project [or the association], and disputes concerning unit owners’ rights, privileges, and obligations.”
And the FHA requires that the individual providing the certification also has “a continuing obligation to inform HUD if any material information [submitted] is no longer true and correct.” Exactly who at a community association is going to go out on a limb and do this?
What community association manager or board member would be willing to accept that “continuing obligation” or provide the guarantees FHA is demanding “even without the threat of up to 30 years in prison and a $1 million fine if the FHA subsequently finds any of the information certified to be inaccurate or untrue.”
As Steve notes, the certification language is unreasonable and unworkable, but he believes it could also be fixed, “or at least partially fixed, fairly easily, by separating the affirmations. Verifying compliance with state and local laws requires a legal assessment that managers and boards aren’t qualified to make, but the association’s attorney could provide that assurance. Likewise, the lender or the lender’s attorney should be able to attest that the community complies with the FHA’s regulations, although the outsized penalty for errors might understandably discourage some from doing so.”
Steve finds it “even more disturbing [that] the FHA appears to be viewing assessments and loans as negative indicators, reflecting poor financial management. The agency has reportedly rejected two certification applications because the communities had special assessments and one because the community had an outstanding loan.”
Steve concludes that we need to recognize that the new FHA guidelines are still new, that we don’t know how the FHA will interpret the certification requirements or how agency staff will apply them in application reviews. He notes that “sometimes the initial reaction to new regulations is an overreaction. Requirements that seem rigid on paper may become less severe in practice. But this guidance on paper provides considerable cause for concern. If the major problems aren’t corrected, Andrew Fortin, Community Association Institute’s Vice President of Government and Public Affairs has warned, “FHA approvals for community associations will come to a loud, screeching halt.”
To read Steve Marcus’s article in its entirety, follow this link.
Questions regarding FHA certification? Contact David C. Swedelson, California condo lawyer and HOA attorney via email; dcs@sghoalaw.com.