FHA Condo Changes: More Questions Than Answers?

The Federal Housing Authority (FHA) recently released Mortgagee Letter 2011-22, which addresses some of the concerns raised in a May letter to the FHA from several different housing-related trade groups. At least one of the trade groups, however, remains unhappy with this most recent missive, saying it raises still more issues because of the FHA’s “disregard” for transparency.

The latest letter shows the FHA responded to issues related to assessment delinquencies, commercial space, affordable housing and rental restriction, notes Andrew Fortin, Community Association Institute’s (CAI) vice president of government and public affairs, but it also spawned some inconsistencies on federal/state levels, he says.

“[FHA] took into account and resolved some of those issues [mentioned in a May letter to the FHA], but then they created a host of new issues that I think are even more problematic than the ones they resolved,” says Fortin. “The FHA continues to create rules for this program in a vacuum. They come up with provisions without providing prior notice to affected parties, like home builders, realtors, banks, etc. They assume they know the market and know best, and then they come out with things that have a profound impact on industry workers.”

Some aspects of the most recent mortgagee letter that, he says, don’t “comport” with already-existent state laws.

For example, one of the new guidelines says that in order to be insured by the FHA, condo associations may have no more than 15% of their units be more than 30 days past due in assessments. The CAI has no problem with the benchmark of 15%, but often, condos that are past due on assessments don’t get on an associaton’s radar screen until after the 30 days have passed. Additionally, in North Carolina, state law mandates that condo associations must wait at least 30 days before trying to collect past due assessments; this state law does not comport with the new federal guidelines, Fortin points out.

Fortin also points to a new requirement that management companies for condo associations must take out fidelity insurance policies. While the requirement makes sense, he says, in Maryland, state law requires that if a condo association has a management company, the association must take out an insurance policy on that company. So under the new guidelines, in Maryland, management companies will have to get another insurance policy, even though they’re already covered.

“It appears the FHA didn’t even do the minimum due diligence to see if their guidelines would comport with state requirements,” says Fortin.

Another example is a requirement that the association, management company or attorney sign a certification that the association is in compliance with all state and local condominium laws, and all FHA approval requirements. Additionally, the person who certifies compliance must attest that all information is true and correct and that the signer has no knowledge of any condition that would cause a unit owner to become delinquent or know of any “substantial disputes concerning unit owners, rights, privileges or obligations.”

This, he says, may limit endorsements of both forward and reverse mortgages, especially as signers have an ongoing obligation to report any changes or developments HUD even if they are no longer part of the condo association board and are completely disassociated from any unit.

“People looking to get a reverse mortgage are going to have a much more difficult time obtaining them. We think the certification requirement, having someone sign it under criminal penalty, is going to have a chilling effect on anyone producing an FHA-insured loan,” says Fortin. “To the extent that there’s problems with mortgages within condos, they have nothing to do with the condo association, it has to do with banks giving mortgages to people who are underqualified. The FHA is punishing condo associations for the lax lending attitudes of banks. It’s just ridiculous.”

Overall, Fortin says CAI is disappointed in the new guidances because they’re counter to what FHA has indicated previously: that there would be no surprises, and plenty of opportunity for those in the industry to meet the requirements.

Instead, the market got something of a jolt, he says.

“OK, you drop this June 30, effective July 1, and all of a sudden hundreds of associations need to scramble to meet new requirements without time to adapt,” Fortin says. “I’ve been in Washington, D.C. for 20 years, and in all my time here, I’ve never dealt with an agency that’s acted with such reckless disregard for process and transparency.”

Written by Alyssa Gerace

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