by Christopher Gardner | Monday, August 20, 2012
Another completely misguided and ill informed board making erroneous decisions that will have a long lasting, negative impact on the association and its property values.
Here’s a letter we received from a condo association board member stating the reason why they’ve declined to pursue FHA Approval for their condo.
"After thoughtful consideration, the Board has decided against registering the D***** Plaza Association with the Federal Housing Administration. While it is understandable that some of the programs offered by the FHA could be beneficial, they do not outweigh the fees or restrictions that the FHA requires, and can impose.
The following list includes some of the items that were considered when making the decision.
- Recent changes to FHA guidelines and certifications.
- New requirements for reserve studies for new conversions.
- New and risky certification for special assessments.
- New delinquency rules.
- New and very risky project certification to be signed by manager or association.
- Effective date for some changes is immediate.
- Expanded financial records now required.
- Fidelity insurance changes required.
- FHA rejection for association loans and special assessments.
Thank you for bringing this matter to our attention and for the opportunity to research it more fully."
1. There are no real changes to FHA guidelines and certifications. Ninety percent of the qualifying criteria are the same as they have been for decades.
2. There are no new requirements for reserve studies for new conversions.
3. This conclusion is just plain bizarre. Special assessments are very frowned upon by HUD and their existence makes an HOA ineligible in most situations. There is no certification, and the “risky” comment is dumbfounding.
4. There are also no “new” delinquency rules. Delinquencies can be no more than 15% of the total units, and it has been this way for decades.
5. New and “risky” project certification to be signed by manager or association. This board member is referring to the Appendix A, which is signed under penalty of a million dollar fine and thirty years in prison. It states that the information is true and correct. However, this penalty only covers “fraud”, not innocent mistakes. The association only has to worry about this certification is if they are committing fraud. Additionally, if the HOA retains a consultant firm to process the application, the sponsor firm signs the Appendix A, releasing the association for liability under this document.
6. Effective date for some changes is immediate? What does this even mean? It is complete drivel.
7. Expanded financials now required. No they’re not. The required financials are the same that have always been required.
8. Fidelity bond insurance must equal the sum of three months assessment, plus whatever is held in reserve. This association obviously doesn’t have enough coverage, so a dishonest board member or property manager could conceivably empty the association’s bank account, and there wouldn’t be enough insurance to cover the losses, which would need to be made up by the owners.
9. FHA will reject an association that has special loans and assessment, because it is an indication of a poorly run and managed association. The monthly HOA assessment should cover ALL of the costs of the association. Special assessments and loans are needed by associations that refuse to increase the monthly HOA dues, and therefore have to rely on one time special assessment, or loans, to cover the cost of maintenance of the property.
I don’t think it is difficult to sense my frustrations with these boards of directors. They’re misguided, ill informed, and have no clue as to the real issues involved with FHA approval. I have to deal with them on a daily basis, no easy task. They’re dogmatic and unwilling to listen to reason. And what is really a chunk of irony is it is these same board members who sat idly by and watched countless real estate speculators and buyers purchase within their association with zero down payment and no income verification! God forbid buyers now, using an FHA loan, are fully vetted from an income, credit, and down payment standpoint. It is going to be interesting to see what types of litigation come out of the actions of these boards, because as more homeowners become better informed, they are going to look to hold these boards accountable for the erroneous decisions they make.
by Christopher Gardner | Wednesday, August 08, 2012
I was recently sent this from an owner in an association whose board considered the subject of FHA approval, its pros and cons, and published this to its members as their findings and voted unanimously not to pursue FHA approval. It would be laughable if it weren’t so common.
"FHA Building Approval
The Board of Directors discussed at length the pro's and cons of having the Association FHA approved. For the following reasons, it was their unanimous decision not to proceed with obtaining approval and this decision is within the discretion of the Board under the "Business Judgement Rule":
- The amount of fidelity Bond coverage will need to be increased by 250% to meet FHA requirements, at an additional unbudgeted cost to the Association.
- The Capital Reserve Fund will need to be updated annually at a cost that is not in the Operating budget. Therefore, there will need to be a substantial increase in the maintenance fees in order to carry the additional funds that will be required to fund the Reserve Account per the updated study.
- With FHA mortgages, unit owners may finance up to 97% of the value of their home. Therefore, there is minimal equity in the home and over time, can be over leveraged especially if current market values continue to decrease, as what has already happened with the economy.
- The Association's balance sheets and collections will be impaired by permitting purchasers to acquire units with up to 97% financing. More times than not, they will not remit their maintenance fees in a timely fashion.
- No more than 30% of the units in the community can be subject to FHA mortgages.
- Therefore, all of the aforementioned conditions would be put in place for the benefit of 54 units at the expense of 180 unit owners, knowing that 126 owners will not benefit from being FHA approved."
Conclusion number one is accurate, in that the fidelity bond coverage would need to be increased to cover the sum of three months of the standard assessment, plus whatever is held in reserve. Fidelity bond coverage is extremely inexpensive to increase, something this particular board didn’t bother to investigate.
Conclusion number two is completely erroneous. No reserve study is necessary, provided that the association budgets 10% of the standard assessment to reserves.
Conclusion number three defies logic. The statement, “there is minimal equity in the home and over time, can be leveraged especially if current market values continue to decrease”, is nonsensical. The exact OPPOSITE is true, which is to say that the more values drop, the less leverage there is since the equity is declining, not appreciating. No one putting 3.5% down payment is going to be able to refinance any money out of the property in the foreseeable future, given current market conditions.
Conclusion number four not only is ridiculous; the statements contained therein likely violate a number of Federal and State housing discrimination statutes. The judgment that FHA borrowers, more times than not, will not remit their maintenance fee in a timely fashion is arbitrary, capricious, and completely unsupported by the facts, and evidences this boards obvious bias towards government insured borrowers.
Conclusion number five is also incorrect. Fifty percent of the units within an association are eligible for FHA financing, not thirty percent. This is called FHA concentration, and can be as high as 100%, on a case-by-case basis as decided by HUD.
As one can see, boards across the country are breaching their fiduciary duty owed to the association, when considering this most important issue of FHA approval and coming to conclusions that are factually incorrect and discriminatory in nature. I cannot understand how, in this market, an association can eliminate forty percent of the current buyers by voting down FHA approval. Unfortunately, this is a problem that plagues a large percentage of the associations across the country and will not change until these boards educate themselves and gather the facts about FHA approval and its market share.
by Christopher Gardner | Tuesday, July 31, 2012
It is an astounding fact that there are only 325 FHA approved condominium projects in Florida, out of an estimated 25,000. As the sunshine state, Florida built condo projects so quickly in the 1990’s and early 2000’s that it became a running joke that the state bird should be changed to the crane.
Certainly the mortgage/real estate meltdown didn’t help matters, but there are problems endemic to Florida that will prevent an increase in FHA market share for the foreseeable future. Unfortunately the general unavailability of FHA condo loans presents yet another obstacle to the recovery of the condominium market in Florida.
Reserves are the primary problem for associations in Florida. The real reason for the problem is that the state’s Condominium Act doesn’t require them. It has been practice, good or bad, to assess members of the association a special assessment to cover the cost of deferred maintenance such as roofing, paint, etc. HUD abhors special assessments, as in their view it is an unfair and arbitrary burden to require members to pay potentially large special assessments with sometimes little or no advance warning. HUD and conventional wisdom dictate that monthly dues increases are the appropriate method for increasing reserve allocations, thereby avoiding the need to levy special assessments. To be eligible for FHA certification, HUD requires that an association allocate at least 10% of standard assessments to reserves. Until condominium associations in Florida begin to proactively allocate to reserves on their own, in the absence of a state requirement, inadequate reserves will be the number one reason for association ineligibility.
Florida’s sunshine, beaches and warm weather are both a blessing and a curse to condominium associations. It’s a blessing to live in such a climate, but a curse in that it produces a large demand for rentals within the state, specifically in the resort areas. For FHA certification, HUD requires that more than 50% of the units within an association be owner occupied. This requirement is obviously problematic for associations where there is a high concentration of rentals, whether short term or long term. Additionally, HOA’s that allow rental periods of less than thirty days are considered condotels, and are therefore ineligible for FHA certification.
Lawsuits have most certainly been a problem in preventing Florida associations from obtaining FHA certification. The rush to build has resulted in many construction defect lawsuits, a big no-no for FHA certification. There is light at the end of the tunnel on this issue as eventually all of this litigation will either go to trial or be resolved in some other way, and will therefore no longer stand in the way of FHA certification.
Associations would be wise to be mindful of HUD requirements and do what they can to meet them. FHA market share is hovering around forty percent currently, with no decrease in the immediate future projected. Eliminating forty percent of the buyers in a marketplace is sure-fire way to hurt values, sales and the market as a whole.
by Christopher Gardner | Monday, June 13, 2011
“When everyone else is greedy, be scared. And when everyone else is scared, be greedy.” - Warren Buffet
In the last quarter, almost half of all mortgages were FHA insured mortgages. There are some that think such large government involvement in the mortgage market is bad for the housing market and its participants. I am not one of these people. I believe that it is beneficial for FHA to be increasing their market share of the mortgage market for the reasons I’m about to list.
To begin with, FHA does not issue mortgages. What FHA does do is insure them in the event of default by a borrower. Virtually every single consumer bank in the United States funds the mortgage, and then obtains an FHA insurance certificate that attaches to the loan, provided that loan is underwritten according to FHA loan guidelines.
So why should FHA be insuring so many mortgages? First of all, if they weren’t, about half of the mortgages would not be funding. Think of the debacle this would create. Values would get whacked even more, more REO inventory would pile up, and we would be experiencing a severe double dip housing bust. Not a good thing for anyone in the real estate market.
The reason why there should be no fear of the government’s increasing role is because the loans that they are now insuring will perform. The borrowers who now qualify, really qualify, and now can no longer state income and assets and obtain a loan. Further, values have come crashing down to reality and rates are at historic lows, two important events that converge to give them a payment that closely approximates what the fair rental of the property would be, thus providing an exit strategy, something homeowners of the past never considered. So now, if a borrower loses his job and can no longer afford the house, he can rent it instead of walking away from it. I never understood how buyers in the past could buy a home that left them with a $4,000 a month payment, when that same house only rented for $1,800. No exit strategy! Not much thinking either. And of course they didn’t have very good council, because the person they sought out to handle the financing for the most important contract they would ever sign, was the twenty four year old “loan officer” who was the friend of a friend, not a seasoned professional with the expertise and experience to guide them.
In addition, the quality control that is in place should prevent those who don’t qualify from getting a mortgage, and should eliminate the rampant fraud and criminal activities that led to all the mortgage problems in the first place. FHA lenders now verify the income that a borrower claims to make with the IRS. This is done by completing and validating IRS for 4506T, which provides the lender with a transcript of the applicant’s filed tax return.
Lenders (and FHA) need to be vigilant in one other area of quality control, and that is appraisal. Appraisal procedures have seen dramatic changes in the past two years, most of them for the better. However, a lender needs to have in house appraisal review of the appraisal submitted with the loan. This will ensure that any stretching of values or any monkey business with the appraisal is discovered, and the offending party will get on the kind of list he doesn’t want to be on.
FHA’s market share is going to increase due to other factors. Fannie Mae and Freddie Mac have been bailed out to the tune of 170 billion dollars and counting, and many doubt these GSE’s ability to survive their current financial problems.
Finally, recent financial overhaul legislation requires the lenders of non-fha mortgages to retain a five percent “skin in the game” for every mortgage they originate, which is going to stifle non-FHA lending. FHA should heed Warren Buffet’s advise, because everyone else is scared right now.
by FHA Pros | Friday, May 27, 2011
FHA Pros, LLC, a national FHA condo approval service, has developed a list of facts speaking to the top misconceptions associated with FHA loans in order to help home buyers better navigate an already confusing market. FHA loans are mortgages issued by qualified lenders and insured by the Federal Housing Administration (FHA).
“We have seen home buyer interest in FHA loans go from practically zero three years ago to upwards of 87% today,” said Christopher Gardner, founder and president of FHA Pros, LLC. “Despite this rapid rise in popularity, many buyers still do not fully understand the benefits of these loans, and we believe it’s time to change that.”
1. FHA loans are not only for lower-income borrowers. FHA loans are available to everyone. There is no maximum income restriction associated with FHA loans, but borrowers do need to substantiate income and assets by submitting proper documentation. This requirement ensures that borrowers are well-vetted and truly able to afford their future homes.
2. FHA loans are not only for first-time buyers. Many people believe FHA loans are available only to first-time home buyers, but this is not the case. Whether borrowers are making their first home purchase or their fifth, they can look to FHA loans as a home financing option.
3. FHA loans are not just small loans; in fact, loan amounts can be as high as almost $800,000. The government recently raised the maximum loan amount from its original cap of $362,790 to $793,750 as a way to help stabilize the housing market. The amount a buyer can borrow varies from county to county though. Later this summer, condo buyers interested in FHA loans can visit http://www.checkfhaapproval.com to instantly identify FHA-approved condo associations and review maximum loan amounts for a given location.
4. FHA loans are not affiliated with the section 8 housing program. While both programs are administered by the U.S. Department of Housing and Urban Development (HUD), FHA loans have nothing to do with low-income subsidized housing. FHA loans are simply mortgages insured by FHA. This insurance provided by the federal government allows lenders to lend more freely by assuring them that they will be repaid in the event of default. Most traditional lenders, including Wells Fargo & Co., JP Morgan Chase and Citigroup are able to provide FHA loans to their customers.
5. FHA loans are often more affordable than conventional loans. While FHA loans typically offer the same interest rates as other loans, borrowers benefit from a much lower down payment of as low as 3.5%.
6. FHA-approved condo developments are more desirable to buyers. With 87% of home buyers indicating that they plan to use FHA loans, condo associations that are not FHA approved are missing out on a significant pool of prospective buyers. Under rules in place since February 2010, an entire condominium development must now apply to HUD and be granted FHA approval before a buyer can purchase a unit in an association with an FHA loan or before an existing unit owner can refinance into an FHA loan.
Due to the general unwillingness of today’s lenders to extend credit with respect to conventional loans, many borrowers find that FHA is their best bet. Lenders don’t mind lending when the federal government (FHA) assures them of repayment.
Homeowners associations (HOAs) should note that although FHA-insured mortgages might be easier to obtain, they are not “risky” loans, due in large part to the strict “full documentation” requirements placed on borrowers. Individual buyers or sellers can initiate the approval process or current owners can encourage their HOA to apply.
7. FHA loans are assumable. In addition to lower down-payment and credit-qualifying requirements as compared to conventional loans, FHA loans are assumable. This means that when a seller with an FHA loan sells his or her property, the loan and its financing terms (interest rate) can be transferred to the new buyer. This unique feature will certainly make a property more valuable in times of rising interest rates.
“Now, more than ever, buyers and sellers need to understand the options available to them when it comes time to buy a home,” continued Gardner. “At FHA Pros we have worked with countless HOAs, attorneys and individuals to easily and efficiently navigate the historically tricky FHA-approval process.”
by Christopher Gardner | Friday, July 16, 2010
The screaming and cursing you hear in unit 404 isn’t coming from Mr. Armbrister’s television—Armbrister has just learned that another potential sale of his condominium unit fell through due to the buyer’s inability to obtain financing. In this case, the buyer wanted to purchase Armbrister’s condo unit with an FHA loan—Armbrister’s homeowners association, however, had neglected to obtain FHA approval.
FHA loans, which are mortgages insured by the Federal Housing Administration, accounted for a mere 1.7% of new mortgages as recently as 2006. Today, almost half of all new mortgages are FHA—yet there are still many misconceptions associated with their use and their benefits.
Due to the elimination of ‘spot approval’ in February 2010, an entire condominium development must now apply to the Department of Housing and Urban Development (HUD) and be granted FHA approval before someone can purchase or refinance a unit using an FHA loan. Before its elimination, spot approval allowed an FHA buyer or refinancer to conduct a transaction in a specific condominium unit located in an unapproved complex.
Management companies and homeowners associations constantly ask why their condominium developments should seek FHA approval. A recent survey of more than 12,000 home buyers conducted by the Home Buying Institute indicated that the vast majority of respondents (87%) planned to use an FHA loan for their purchase. Given the prevalence of FHA loans in today’s housing market, the simple answer is that unit sellers in an association without FHA approval are severely limiting the pool of potential buyers. Thanks to the law of supply and demand, fewer possible buyers mean units will often sit on the market for longer periods and sell for lower prices. Even non-sellers are affected as lower sales prices for neighboring units often result in lower appraised values for all units.
Why have we seen such a surge in FHA borrowing? First, the general unwillingness of today’s lenders to extend credit and an almost complete withdrawal of private capital from the home mortgage sector forced HUD and FHA to take action. They ultimately crafted policies to increase FHA availability in order to help stabilize the housing market. FHA loans encourage lenders to lend, assuring them that they will be paid back by the federal government in case of default.
Second, as many residential real estate agents know all too well, the sudden and inevitable collapse of the high-risk subprime mortgage industry left a tremendous void in the marketplace for those buyers that did not have the 20% downpayment typically required when obtaining a conventional loan. This void is nicely filled by FHA loans, which require as low as a 3.5% down payment.
Finally, the significant increase in the maximum FHA loan limits from $362,790 to $793,750, means that an FHA loan is now relevant and appropriate for a much greater percentage of home purchases and refinances than ever before.
In addition to the benefits discussed above, there are other features inherent to FHA loans that help explain their newfound popularity. Credit requirements are less stringent than is the case with conventional loans. Also, FHA loans are fully assumable, meaning that a seller with a current FHA loan can offer the financing and terms to a buyer during resale. Assumability will be a great benefit to a future seller when interest rates turn higher.
Despite FHA’s easier down payment and credit qualifying guidelines, associations should not fear that FHA loans are risky and real estate agents should feel comfortable suggesting them as an option to their clients. “Full documentation” requirements ensure borrowers are fully vetted for their ability to afford the property in question. With the required income and asset reporting demanded by FHA, foreclosure rates have been historically lower than for those with any other type of loan—a fact that should give homeowners associations peace of mind.
Associations and management companies should further investigate and consider all of the benefits that FHA loans provide. Real estate agents should be prepared to help their clients navigate the process, as it will only help increase sales in a tricky market.