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FHA Reignites Transfer Fee Battle

The Federal Housing Administration recently announced plans to begin disqualifying condominium associations from FHA financing if an association charges a deed-based transfer fee at the time of sale.  This puts FHA at odds with the Federal Housing Finance Agency, which earlier this year determined that such fees benefit community associations and do not impact the sale of community association properties.  It makes yet another unilateral action by FHA – without public notice or input – that will have a detrimental effect on the condominium market. 

FHA did not formally release the pending requirement, but instead mentioned it as part of a training session on new FHA requirements in its June 30 Mortgagee Letter.  FHA has since indicated that it will get public input before finalizing the matter, but until that takes place sometime in 2012, condominiums with deed-based transfer fees will be cut off from FHA-backed mortgages.

Members may recall the fierce and successful battle CAI waged against FHFA on community association transfer fees earlier this year.  FHFA’s draft regulation would have cut off all federally backed mortgages to community associations with deed-based transfer fees.  A CAI national survey found that 49 percent of all community associations have a deed-based transfer fee.  These fees are levied at the time of sale to fund reserves, capital projects or operations.  They are typically less than $500 and are calculated as a percentage of sale price, a fixed fee or a multiple of monthly assessments.  The challenge is that such fees are incorporated into the deed restrictions of the community association, which typically require a two-thirds majority of all property owners to change.  FHFA sought input from the public and received more than 4,000 comments on the proposal.  Based on the information received, FHFA revised its regulation to allow the fees.

Apparently, FHA doesn’t find the information gathered by FHFA on the same topic to be relevant to its decision.  Unfortunately, FHA continues to issue requirements for its condominium mortgage insurance program without the benefit of public input.  FHA requirements for condominium mortgages have been confusing and problematic for associations.  In a statement submitted to the House Financial Services Committee on an FHA hearing, CAI noted that FHA’s lack of stakeholder input “has resulted in underwriting criteria for condominium associations that do not comport with common association business operations, state law or common sense.”

In August, CAI members from key state legislative action committees met with members of the House Financial Services Committee to let them know the problems FHA is creating in the condominium marketplace.  CAI continues to expand is grassroots efforts to persuade FHA to engage in a more transparent process in developing criteria for condominium mortgages.  As FHA currently accounts for one in three condominium loans, getting the rules right is key to restoring confidence in the marketplace.  Despite CAI’s progress on a variety of mortgage issues, FHA continues to be a source of confusion and frustration for condominium associations.  Worse, many banks are now underwriting non-FHA condominium mortgages to FHA standards.

 As part of CAI’s ongoing Mortgage Matters program, CAI is working to protect homeowners in community associations and to ensure access to fair and affordable mortgage products for all current and potential community association residents.  You can follow our work and share your thoughts at www.caimortgagematters.org.  CAI will continue to monitor and participate in shaping the development of FHA’s condominium underwriting guidelines to ensure that the perspective of community associations is heard.  If you have any questions about FHA’s underwriting criteria and how it could affect you, email government@caionline.org with FHA Mortgage Insurance Requirements in the subject line.