New FHA policy hampering condominium market

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FHA certification for Mandalay Villas, a condo community built in 2002, expired following a change requiring all complexes to recertify every two years.

Recent policy changes for the Federal Housing Authority’s condominium certification is causing problems for buyers, sellers and homeowners’ associations.

And many don’t even know they’re in trouble yet.

The Federal Housing Authority established a new policy in June that requires all condominium projects to reapply for FHA certification every two years. Since then, FHA certification on more than 70 percent of the condo complexes in Colorado Springs has expired.

Without FHA certification, buyers cannot qualify for FHA loans, which means sellers have a limited pool of buyers to draw from.

Only a handful of lenders offer conventional non-FHA loans for condominiums these days, said Lenard Rioth, an attorney with Springs-based Anderson, Dude & Lebel who represents more than 100 homeowners’ associations.

And the requirements for a conventional loan in most cases are just as stringent and expensive to meet as those for an FHA loan.

That clears the field for cash buyers — who are almost always investors looking for a deal and driving down prices.

Investors also tend to rent out the condo units they buy, and a high ratio of rentals to owner-occupied residences in a community can disqualify it from FHA support, perpetuating the problem.

“I would say at least 50 percent of people who live in condos have no idea about this until they go to refinance or sell,” said Colorado Springs mortgage broker Marti Greeley.

That’s what happened to a seller at Mandalay Villas near the intersection of Powers Boulevard and South Carefree Circle earlier this month. There are four units for sale in the 2002 development.

Stacey Kilber, an agent with Keller Williams Real Estate, represents a seller in the complex and didn’t know until she had a buyer get rejected that there was anything wrong with the FHA certification.

It used to be that a project was approved when it was built and that certification was good for the life of the complex, Rioth said. Not anymore. And it’s a surprise to a lot of people.

“The FHA doesn’t send any notice when a project’s certification is going to expire,” he said.

The Housing and Urban Development office in Denver, which manages FHA certifications in the state, confirmed that it does not alert management companies or homeowners associations about their standings, but said the information is available on the agency’s website.

But few condo owners check the website, apparently.

Of the 109 previously approved condo communities in Colorado Springs, 76 of them — about 70 percent — have expired FHA certifications, and only seven communities have recertified. The remaining 26 complexes will have to decide within the next few months whether they are going to pursue recertification.

Greeley said she’s had several clients in recent months who tried to buy condos in complexes with expired FHA certifications and has had to tell them to walk away from the deal.

She did have one client insist on pushing the deal through in a short five days before the FHA expiration.

“I told her to walk away, that she wouldn’t be able to sell it or refinance it once she got in,” Greeley said. “But she wanted to live there. She wanted to go through with it.”

Other than that instance, Greeley said she’s had qualified borrowers who wanted to buy units that were in good condition in nice and newer buildings, abandon the deals.

“It’s horrible for these homeowners,” Kilber said. “They can’t sell. They’ll never be able to sell. They’ll be forced to walk away.”

So, who is responsible for filing recertification paperwork?

“That’s it, that’s the $64 million question right there,” Rioth said.

No one received notification from FHA, designating him or her as the one. Most condo communities hire property management companies to handle their affairs and finances because the associations are made up of ordinary homeowners who have no expertise.

Linea Mellenger with Z&R Property Management stumbled upon the new regulations when one of her residents asked about them.

“I’m just thankful that I was aware of it,” she said.

She’s handled recertification for two of the seven properties in the city that have gone through it. She collected the information for Autumn Heights Condominiums and for Cove at Cottonwood Creek. She sent the information on to a Florida-based company that compiled, certified and submitted it.

“The HOAs do have to pay for it,” Mellenger said.

It cost $1,000 for the consulting company and an additional fee to get a letter from the HOA’s attorney.

Mellenger is trying to manually put the application together for a small nine-unit complex. The task is daunting.

It will be burdensome for complexes to recertify every two years, especially for smaller communities that don’t have the reserve funds, Mellenger said.

While she has taken the task on at Z&R, many property management companies have taken a hands-off approach to FHA certifications.

Haley Realty, which manages the Mandalay Villas complex, is one of those that won’t get involved with FHA certifications, said company president Charlie Oliver.

Oliver said his company has never dealt with FHA certifications for its condo communities, not even when the regulations were simple and straightforward.

And now, he said, there are liability issues.

“FHA rules require that whoever is certifying the information maintains an ongoing reporting relationship with the FHA,” Oliver said.

And that requirement comes with steep penalties, including a maximum fine of $1 million for inaccurate information or failing to report changes that could impact FHA certification.

He said the liability is too much for HOAs to take on and none of the complexes his company represents have opted to recertify with the FHA.

Sherri Lemley, the HOA president at Mandalay Villas, said her association did not actively decide not to recertify. Lemley is a realtor and former loan officer. She knew FHA requirements changed in late 2009and was working on getting the complex into compliance because she is also trying to sell her unit.

But she did not know the FHA certification was scheduled to expire.

“How could I know that?” she said. “Why would I have known?”

She said Haley never alerted her or any of the other HOA board members or Mandalay Villas homeowners.

She didn’t learn that the certification had expired until she got a call from Kilber.

“I wondered why they dropped the price down to $80,000,” she said.

Lemley, who has faith she will be able to get the complex recertified before the six-month grace period runs out in December, listed her unit at $125,000.

She is trying to sort out the complicated documents and understand what needs to be done.

That’s no easy task, Rioth said. The 98-page booklet of regulations and requirements is more laborious a thing than he wants to deal with. While he has the expertise, he said he doesn’t have the time to process FHA re-certifications for HOAs.

“A whole industry has grown up around this,” he said.

Consultants like Sue Hart in Elizabeth, Colo. have started managing the recertification process for condo associations.

“I’ve done a couple in Colorado Springs,” she said. “But I work nationwide.”

She said the regulations have been changing for the last few years and a lot of the changes have been positive because they are designed to make sure the HOA is protecting the homeowners.

“But this last change was ugly,” she said. “It was a 95-page change.”

2009 FHA policy changes

Below are some, but not all, of the requirements HOAs must meet for FHA certification.

The spot loan program was eliminated, meaning the entire complex must be FHA certified before any one unit can be approved for an FHA loan.

All units are sold and no entity owns more than 10 percent of the units in the project (or no more than one unit in complexes smaller than 10 units)

Project’s budget has funding for replacement services and deferred maintenance and reserves of at least 10 percent of the budget.

HOA is controlled by the homeowners and no longer by the project developer.

Owner occupancy is at least 50 percent (vacant bank-owned properties can be excluded from the count).