FHA relaxes rules for condominiums
WASHINGTON — Here's some encouraging news for condominium unit owners, sellers and buyers: The biggest source of funding for low down payment condo mortgages, the Federal Housing Administration, has revamped controversial rules that caused thousands of buildings across the country to lose their eligibility for FHA financing.
The revised guidelines, which were issued Sept. 13 and took effect immediately, should make it easier for large numbers of condo associations to seek certification by FHA. The certification process is intended to provide FHA, a government-run mortgage insurance agency, with key information about a condominium development's legal, physical and financial status. Without approval of an entire project — whether a small garden apartment development in the suburbs or a massive high-rise in the center city — no individual unit can be financed or refinanced with an FHA mortgage.
The agency's previous rules were criticized as heavy-handed, costly and not in touch with the economic realities of condominiums in some parts of the country. For example, the rules prohibited FHA insurance of units in buildings where more than 25 percent of the total floor space was used for commercial or nonresidential purposes. Yet many condominiums in urban areas have lower floors devoted to retail stores and offices that generate revenues that help support the entire project. Many of those buildings suddenly found themselves ineligible for FHA financing for residents. The revised rules allow exceptions up to 35 percent commercial use, and provide for additional case by case exceptions to 50 percent or higher.
As a direct result of the previous FHA rules, just 2,100 of the estimated 25,000 condominium projects nationwide that were eligible for unit financing were recertified by late last year, according to the agency. Insurance volume also has plummeted. FHA estimated that it would insure 110,000 condo unit loans during fiscal 2012, which ends this month. But by July, it had only insured 35,433 units.
Though the previous rules focused on entire buildings, individual unit owners seeking to sell often have taken the brunt. Andrew Fortin, vice president of government affairs for Associa, a condo and homeowner association management firm based in Dallas, said he recently saw condos in the Tampa area that could no longer be financed with FHA mortgages and are now selling for $15,000, all cash.
One of the most significant changes FHA made involves personal legal liability for condo association boards and officers. The previous rules required officers to attest that they have "no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit" to become delinquent, no knowledge of "dissatisfaction among unit owners about the operation of the project or owners association" or "disputes concerning unit owners." The penalty for officers who "knowingly" and "willfully" submitted information to FHA that was found to be false: fines of up to $1 million and 30 years in prison.
Not surprisingly, many condo board officers declined to take on what they interpreted as lifetime legal responsibility for such details as whether the condominium fully complied with state and local environmental and real estate requirements. Though FHA insisted the associations were overreacting, the new certifications contain much less scary language. The penalties for intentional frauds against the government remain the same, however.