PMC Mortgage Lender's Blog

The Federal Housing Administration's (FHA) new condo rules rolled out at the end of last month have drawn fire from industry executives and community managers.

Ken Harney, Inman News reports, “FHA's tougher regulations have a wet-blanket effect on associations' ability – and willingness – to get their projects approved for financings by the agency.”

Without an entire project certified, potential buyers of units cannot obtain FHA-backed loans.

“The biggest complaint about the new FHA rules,” said Mark Lewis, executive vice president of Associa, the nation's largest community management firm, “is the requirement that anyone who signs an application for certification or recertification of a project must assume full responsibility under federal law for the accuracy of every piece of information contained in the submission.”

The penalties for inaccurate or omitted information can range up to $1 million in fines and 30 years in prison.

Many association boards and managers, faced with such ominous penalties, are reluctant or simply cannot guarantee with absolute accuracy the myriad items required for certification. Such items as the percentage of units currently occupied by renters on a given date, or whether project documents are in full compliance with every state law and regulation may not be known.

Many of these condos drafted their underlying documents years ago and have not necessarily kept them up to date with relatively minor changes in state law.

Another rule requires no more than 15 percent of all units in the project to be no more than 30 days delinquent on their condo assessments, including bank-owned (REO) units, which are notorious for nonpayment of fees.

Often condo boards can't even determine who actually owns a foreclosed unit, said Andrew Fortin of the 30,000-member Community Associations Institute trade group, "so how can FHA expect volunteer condo boards to find this information and collect the assessments?"

“Worse yet,” he said, “most boards or management companies don't learn about delinquencies on assessments until well after 30 days.”

Fortin's group filed a formal legal challenge against FHA July 22, charging “noncompliance with federal regulations requiring due diligence and appropriate research before issuing rules such as the new condo guidelines."

Fortin says another FHA requirement that condo boards as well as their management companies carry fidelity insurance conflicts with state law. In Maryland for example, fidelity insurance is already mandated, but strict interpretation of the FHA rule would force condo boards to purchase double coverage.

A variety of new technical rules may hamper condo conversions and so-called gut rehabs warns Philip Sutcliffe, principal of the condominium consulting firm Project Support Services. FHA's new rule that requires professionally prepared studies of financial reserves will be too expensive for many projects to afford.

As a consequence of these and other concerns about the new rules, only 1,000 of the approximate 12,000 eligible projects have completed recertification in recent months – a no show rate that critics call ominous.