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Originally published Friday, May 18, 2012 at 8:03 PM

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FHA may ease mortgage rules for condos

According to condo experts, real-estate agents, lenders and builders, the rules have become overly strict and have cut off buyers from their best source of low-cost mortgage money, frustrating the real-estate recovery the Obama administration says it advocates.

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WASHINGTON — Thousands of condo-unit owners and buyers could soon be in line for some welcome news on mortgage financing: Though officials are mum on specifics, the Federal Housing Administration is readying changes to its controversial condominium rules that have rendered large numbers of units ineligible for low down payment, insured mortgages.

The revisions could remove at least some of the obstacles that have dissuaded condominium homeowner-association boards from seeking FHA approvals or recertifications of their buildings for FHA loans during the past 18 months. Under the agency's regulations, individual condo units in a building cannot be sold to buyers using FHA-insured mortgages unless the property as a whole has been approved for financing.

According to condo experts, real-estate agents, lenders and builders, the rules have become overly strict and have cut off buyers from their best source of low-cost mortgage money, frustrating the real-estate recovery the Obama administration says it advocates.

Christopher Gardner, managing member of Northridge, Calif.-based FHA Pros, which assists condo boards to obtain FHA approvals, said barely 25 percent of all condo projects that are potentially eligible for FHA financing are approved. That is even though FHA financing is the No. 1 mortgage choice for half of all condo buyers and is crucial to first-time and minority purchasers, Gardner said.

Moe Veissi, president of the National Association of Realtors and a broker in Miami, says the FHA's strict rules "have had an enormous impact on individuals" across the country, especially residents of condo projects who suddenly find they are unable to sell their units because their condo board has not sought or obtained approval from the FHA as the result of objections to the agency's strict criteria.

This, in turn, depresses the prices unit owners can obtain and ultimately harms their equity holdings and financial futures, Veissi said.

FHA officials defend their requirements as necessary to avoid losses in the insurance fund, but have expressed a willingness to reconsider some of the issues that have upset condo owners and the real-estate industry. Among the biggest areas of criticism are FHA limitations on:

• Non-owner occupancy. The agency requires that no more than 50 percent of the units in a project or building be non-owner-occupied. This rule alone has made large numbers of condos in hard-hit markets ineligible for FHA financing, where investors have purchased units for cash to turn into rentals.

• Delinquent condo association fee payments. The FHA refuses to approve a project where more than 15 percent of the units are 30 days or more behind on payments of condo fees to the association. Given the state of the economy, this has been a problem for thousands of associations.

Steve Stamets, a loan officer with Apex Home Loans in Rockville, Md., says some sellers and buyers have been so frustrated by the rule that they have offered to pay the amount of delinquent fees needed to bring the overall project into compliance "just to get the deal done. This is a ridiculous situation," said Stamets. "When somebody calls up now and says they want to buy a condo with an FHA loan, I cringe."

• Nonresidential space usage. The FHA has set a cap of 25 percent of the total floor space in a project for commercial use. Critics say this is too low and unrealistic for condo projects in urban areas, where retail and office revenues can be important to overall financial feasibility.

The agency has imposed a long list of other requirements on insurance and reserves, plus a highly controversial rule that associations interpret as creating severe legal liabilities for condo board officers if applications for FHA approvals contain inaccuracies.

Andrew Fortin, vice president for government and public affairs at Dallas-based Associa, one of the country's largest homeowner-association management firms, says many boards, facing the prospect of up to 30 years in prison and heavy financial penalties, have refused to apply solely because of this personal liability requirement.

The FHA is expected to clarify the personal liability language and make other modifications in its forthcoming rules. Whether the changes will be enough to persuade condo boards to apply for approvals in large numbers is uncertain, but industry experts say they — and unit owners — are likely to welcome whatever loosening of the current restrictions the agency can offer.

Ken Harney's email address is kenharney@earthlink.net.

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