Tag Archives: pros

Misleading FHA Certification Warning

In an article titled “FHA Certification Warning” posted in the November 3rd, 2013 newsletter on the blog site Davis-Sterling.com, the author had this to say about FHA certification.

“There has been a debate for years about the wisdom of certifying a development for FHA loan guarantees. Following are the pros and cons of certification:

Argument For Certification. FHA insured loans have become a significant percentage of all condo loans in California. In 2007, they accounted for only 3% of the market. By 2012 they accounted for more than 50% of all new home loans and 80% of first time home buyers. Moreover, loan limits now go to $729,750. As a result, failing to certify would eliminate a significant percentage of potential buyers.

Argument Against Certification. The cost to become FHA compliant may be significant or unachievable. In addition, FHA buyers may be financially unstable. An FHA-insured buyer has a low down payment (3.5% of the purchase price vs. 20% for conventional loans), low closing costs, and easy credit qualifications, which is why the loan must be insured by the federal government. Because FHA buyers are financially weaker, they are less able to handle special assessments and dues increases. As a result, they are more likely to become delinquent and slide into foreclosure. This would have a negative affect on property values and the association’s budget.

Lawsuit Over Refusal. Last week David Byrne of Herrick Feinstein LLP reported that an Ohio condominium association was sued when it chose not to seek FHA recertification. A single mother with a child wanted to purchase a unit using FHA insured financing. When the board declined her request for recertification, she filed a complaint with the Ohio Civil Rights Commission. The Commission, in turn, sued the association. The case is pending.

RECOMMENDATION: Although no decision has been handed down in the case, the fact that the Civil Rights Commission sued the association is troubling. As a defensive measure, boards should review their status as an FHA certified development. If their condominium development is not certified, boards should weigh the pros and cons and make a decision whether certification is beneficial or even achievable. The matter should be put on the board’s meeting agenda and discussed in open session. Any decision not to seek certification must be based on non-discriminatory reasons. The board’s decision and the rationale behind it should then be recorded in the meeting minutes.

Thank you to James C. Harkins, IV, Esq. of Cane, Walker & Harkins LLP for bringing this case to my attention.”

“Reprinted from Davis-Stirling.com by Adams Kessler PLC

Unbelievable that a very prominent California HOA law firm would publish this but they did. No wonder there is so much misinformation about FHA approval. Many of these statements violate State and Federal law, as they evidence a discrimination against those attempting to use an FHA loan to purchase in an association. In addition, they are completely unsupported by any……I don’t know……FACTS!

Stating that FHA buyers may be financially unstable is a ludicrous statement. Their income and credit scores are vetted in exactly the same manner that Conventional loans are. As for the percentage of down payment, the FHA MINIMUM is 3.5%, but many if not most put more of a down payment than the required minimum. Further, Conventional loans DO NOT require 20% as this newsletter indicates. Most Conventional loans in condominium associations are obtainable with 10% down payments. Moreover, the statement that it is the weaker FHA borrower that requires the government to insure them. Again, complete hogwash. The Federal Government backstops Ninety five percent of the mortgages being issued now, since Fannie Mae and Freddie Mac have been taken over. In case you’re wondering how FHA loans have performed against Conventional loans, you need only look below.

Government Bailout Scoreboard (in $)

Fannie Mae & Freddie Mac (Conventional loans) – $180 Billion
FHA – $0

Finally, the statement that FHA buyers are more likely to become delinquent and slide into foreclosure really is unconscionable and flat wrong. There is little difference in the delinquency rates between the two loan options. And to draw the conclusion that having FHA buyers will lead to a negative affect on property values and the associations’ budget is a non sequitur. You know what WILL have a negative affect on property values and the associations’ budget? Less demand, which is accomplished by NOT having FHA approval, as FHA loans are utilized by 1 out of 4 buyers.

It is truly scary that associations are paying legal fees for this type of advise and counsel. Not only is it wrong, but discriminatory and subjects the association to possible litigation. And until this approval becomes required, associations will continue to be misled and misinformed about the FACTS of FHA approval.