Not every condominium board is convinced it should pursue FHA certification. Proceed cautiously.
It’s not that condominium board president Andrew Hayes is the biggest supporter of government-backed home loan programs. He’d rather not have to deal with them.
But it’s a matter of business. That’s why there was little discussion when the manager of Peachtree Lofts Condominium Association in Atlanta asked if board members wanted to recertify with the Federal Housing Administration—a moderately time-consuming and expensive process.
Hayes says falling off the list would have meant bypassing a significant number of potential buyers, driving down competition and prices. Twenty-four condominiums at the 210-unit building have been purchased with mortgages backed by FHA, according to its parent agency, the Department of Housing and Urban Development.
The building was recertified in March.
“We have to do whatever’s best for the association,” says Hayes, an information technology manager. “You don’t want to exclude any part of the market from being able to participate.”
Not every condominium association board thinks that way—to their possible legal detriment.
The other side of a board discussion can go something like this: We don’t want the type of low- to moderate-income person who has to rely on FHA financing to buy a home. They get away with putting less money down and may have the type of financial challenges that can lead to delinquencies, liens and foreclosure.
Experts say not all FHA borrowers, including first-time homebuyers, should be considered bad prospects in the tighter scrutiny of the post-recession world. At the very least, they say, condominium board members should tread carefully when discussing certification.
“I’ve had boards actually put things in their minutes that say, ‘We don’t want to be FHA-approved because we don’t want people of low morality,’ ” says Jon Eberhardt, a certification consultant with Condo Approvals, based in Palos Verdes, Calif.
A Fair Issue?
A discrimination case in Ohio sent ripples through the industry last year and put condominium associations on notice that FHA certification could become a fair housing issue.
The case, Amy Noel vs. Real Property Management Inc. and Spring Creek Condominium Association, stemmed from a single mother’s attempt to buy a unit at the Columbus-area condominium with an FHA-backed loan.
Amy Noel was unable to make the purchase because the association’s certification had lapsed in 2011, and the board declined to reapply. In response, Noel filed a complaint with the Ohio Civil Rights Commission alleging the association had discriminated against her because of her familial status.
Spring Creek board members were blindsided by the allegations, their attorney says.
“They were understandably outraged by it because no one even knew who this person was. They couldn’t have even formed a prejudice,” says Charles Williams, founder of Williams & Strohm law firm in Columbus, Ohio, and a member of CAI’s College of Community Association Lawyers (CCAL).
The condominium association told state investigators that its representatives had never met Noel and that it opted not to recertify for strictly economic reasons—namely, an increase in fidelity insurance coverage that would have been required.
In November, the Ohio civil-rights agency determined it was “not probable” Spring Creek had violated the state’s anti-discrimination law.
“I’m not sure that there’s any great lesson here except that if you are being asked to do FHA, you better have a really good reason for not doing it,” Williams says. “If I’m going to be advising other clients about this, it would be to not meet with any prospective buyers of any kind, so that you don’t really have any knowledge of who they are.”
Spring Creek isn’t entirely out of the woods. The would-be buyer, who did not respond to an interview request from Common Ground, has two years to file a federal lawsuit by making a claim under the Fair Housing Act.
The Ohio case has not gone unnoticed by attorneys and managers who represent condominium associations elsewhere in the country.
California attorney Adrian Adams says a condominium that declines to get FHA certified could find itself the target of a federal action under the legal concept of disparate impact—that a policy inadvertently harms a protected class.
He says boards that choose not to participate in the voluntary FHA program should at least explain why during an open meeting and use “non-discriminatory, economic reasons,” and record the discussion in the minutes.
“If somebody comes to them and says, ‘You didn’t do it because I’m a single black mother and you’re trying to keep me out,’ well, the board can show that it previously reviewed (certification) and laid out reasons why (it isn’t pursuing it), and those reasons had nothing to do with this particular individual,” Adams says.
George Nowack, a partner in the Atlanta law firm Weissman, Nowack, Curry & Wilco and a CCAL member, agrees that it’s wise to keep the conversation about FHA certification at a strictly business level. But to truly insulate the community, Nowack says a board should undertake the process if it can reasonably expect to get approval.
“If your delinquency rate is 30 percent, we all know you’re not going to qualify,” Nowack says. “But if you’re close—or if, in fact, you would qualify—I don’t believe the board is acting in the best interest of the association if it doesn’t try. Boards should do the work to put in the application and have the FHA come back and say whether the community is approved.”
Williams won’t go that far, but he says he typically encourages associations to get FHA certified.
“What I tell my people is, look, if you choose not to do FHA, great, but you’re really closing yourself out of about 30 percent of your market,” he says. “I think people who are afraid of FHA certification may be cutting off their noses to spite their faces. But that’s their choice.”
Paying the Way
The next legal dispute revolving around condominium associations and FHA certification could come from within a community, rather than from a buyer.
Consultants like Eberhardt who submit FHA applications on behalf of clients say they are doing a fair number of jobs for condominium owners trying to clear a last hurdle to a sale or as a requirement to get a reverse mortgage. The owners offer to pay for the process, which typically runs $1,000 or more, and management companies help furnish the necessary information; in theory, it’s a win-win for everyone.
In a relative handful of cases, however, condominium boards or management companies have acted as adversaries and impeded the process. Some of the resistance may harken back to negative attitudes about FHA-backed mortgagees, consultants say.
Eberhardt is usually able to find a workaround, as in one recent case where an owner needed a reverse mortgage to retire.
“He’s going to make (the reverse mortgage) happen, and it’ll be over the dead body of the board,” he says.
Chris Gardner of FHA Pros in Los Angeles says he’s seen boards successfully stymie FHA certification attempts by an owner. He predicts it’s just a matter of time before a seller loses money and uses demonstrable economic damage as the basis of a lawsuit.
“And the lawsuit facts are going to be: I bought a unit in either an association that was approved or that denied approval, and I had a buyer at $300,000 at FHA, and I had to sell it to a conventional buyer for $250,000. Well, now I’ve been damaged the $50,000,” Gardner says.
Attorneys agree an owner whose deal is effectively killed could mount a successful case. Their advice to board members or managers who would interfere in those circumstances: Get out of the way.
“I believe they would be vulnerable if they were throwing up all these roadblocks to stop the FHA certification,” says Adams.
Is the board obligated to cooperate if an outside party, such as a buyer or real estate agent, is the one offering to pay for FHA approval?
That’s different, according to Nowack. “If the person asking for it is not an association member, there’s a really good defense to that lawsuit: ‘We did not owe a duty to you.’ ”
A HUD spokesman says a condominium board’s opposition is a nonfactor when considering an application for FHA certification: “HUD appreciates that there can be challenges in getting condominium units approved when the board or management isn’t in favor of such approval. Even when the board is opposed, HUD will approve a project when all of the appropriate documentation is provided.”
Condominium boards can hardly be blamed for being a little wary of FHA certification, which has become more complicated in recent years.
Whereas condominium units previously could be “spot approved,” the FHA in 2010 began requiring entire associations to get certified before a buyer could come in with a government-insured loan. Associations now are obligated to reapply every two years to keep the status.
At the same time, the federal government imposed stringent standards to better manage its risk—benchmarks that not every community could meet. They include requirements on reserve levels (10 percent of the budget); a minimum required level of owner-occupants (at least 50 percent); and caps on delinquency rates (no more than 15 percent in a 60-day period), among other criteria. Filers also are expected to sign an anti-fraud guarantee that some considered onerously worded.
HUD offered revisions to some of the toughest requirements in 2012 to mostly positive response. Still, professionals on the front lines say they’re getting applications sent back from regional HUD offices, sometimes for unexpected reasons.
“I don’t know whether it’s just the changing of staff or what, but the same application that would have flown through a few months ago gets kicked back with something they’ve never asked for before,” says David Hill, pcam, director of management development for Access Management Group in Roswell, Ga.
Deverick Martin’s 136-unit condominium community in Seattle previously passed muster with the FHA. But when management representatives tried to renew the building in late 2011, they encountered several hurdles, he says. At least one of them was deemed insurmountable: an occupancy limit on units that was built into the condominium’s declaration.
Given that only one unit in the building had an FHA-backed mortgage, Martin, then president of the board, cooled to the idea of certification.
“I thought: This doesn’t really seem to be a factor in whether people are buying units in our complex,” says Martin, president-elect of CAI’s Washington state chapter. “The issue effectively died.”
The bigger picture is telling. Only an estimated 7 percent of the condominium associations potentially eligible for certification are currently FHA approved. As of late March, 10,020 condominiums had “active status,” according to HUD, out of a pool that some consultants estimate at 144,000. The number of active certifications represents an increase from 6,045 in 2011.
Gardner, a former FHA-approved lender, started a consulting company to help associations achieve certification, but he says the “wave” of business he expected has been more like a “drizzle.” His firm ushers about 50 associations per month through the certification process.
Among his selling points to potential clients is that FHA-backed loans are transferable. When interest rates on conventional loans exceed 6 percent, buyers will gravitate toward developments with low-interest, FHA-backed loans that they can assume, Gardner predicts.
“That associations aren’t doing it for just that one reason blows my mind,” he says. “These FHA mortgages are paper gold when interest rates go up.”
Lansdale, Pa.-based FHA certification consultant Phil Sutcliffe, founder of Project Support Services, sees a relatively steady trade from developers who wish to have their new construction projects approved for loans insured by FHA or the Veterans Administration. Such projects face a different set of criteria than established condominiums, he says.
“The reality is, a developer wants to have the broadest range of financing programs available so that anyone who walks through the door can get a loan,” Sutcliffe says. “It’s like a raincoat; better to have it and not need it, than to need it and not have it.”
Eberhardt tells condominiums that getting FHA certified is a sound exercise from a financial standpoint.
“I talk on that point all the time when I speak to groups: ‘Are you in good condition?’ I can’t tell you how many boards have never had somebody aside from their own management company look at what they’re doing,” he says.
No need for the hard sell at Peachtree Lofts, the Atlanta condominium that went ahead with its latest FHA certification. To Hayes, the board president, it is indeed a no-brainer, especially knowing his condominium is in competition with comparable buildings that have FHA certification.
“For me, personally, I think it’s less of a civil-rights issue and more of a market issue,” he says.
For More information on the FHA Certification process, please contact your Association Coordinator or Portfolio Manager.