What's Happening with Condo Loans - Is Financing in Serious Jeopardy?

Are there MORE financial (or financing issues) for associations?

The simple answer is "Yes". The subprime mortgage fiasco continues in its domino effect. The continued backlash has seriously taken its toll on available money for properties in homeowners associations, and it looks like condos will be hardest hit by the latest individual unit financing issues. 

Here is one of the things that is occurring. With prices dropping like flies, investors are swooping in and picking up the pieces. That can be a "lifeline" if it revives an HOA having trouble collecting assessments from "walkaways".

It can also be a detriment if it results in a situation where an investor buys too many units in one development and usurps control by virtue of majority voting rights.

And, if any investor purchases more than 10% of the units, it takes the association right out of the pool for FHA loans. This will adversely affect the financing capability of potential buyers intending to owner occupy and rely on FHA financing.

No More "Spot" Certification for Condo Associations. What the Heck Does That Mean?  

Speculators are saying that FHA financing will be the most  likely source of funds for individual (non investor) loans in these times of tight money. Here is the rub: FHA is no longer allowing "spot certifications" in a condo association for one loan by one lender. The certification process used to be accomplished by completion of a lender questionnaire and attestations by the lender. Although completion of these forms (because of the lack of consistency and the variety of the questions asked) was problematic for HOAs and Managers it did commonly get done one way or another. Even some of those managers and board members who fully understood the potential issues related to creation of a new legal relationship (with the buyer and lender) and the liability exposure for what was said - or unsaid - would complete the forms so that the units could smoothly turn over to (hopefully, in these times) more fiscally capable owners.  

Now, there are additional hurdles created by this new wrinkle. A condo association will have to be "project- certified" for any individual to be able to finance an owner-occupied purchase in the development.

What Are Some of The Remaining Questions?

Does the Condo Association satisfy the criteria needed to qualify? There are limits on certain aspects like 15% delinquencies, the 10% ownership thing, certain required attestations in governing documents, proof of insurance coverage (100% property coverage and liability coverage), exclusion of most developments that have more than 20% commercial representation (with some exceptions), and last but not least, having to attest to the "adequacy" of finances in various contexts.

"Project Certification" is a process. Although the intent is for a "streamlined" process, attestations have to be made, forms have to be filled out, governing documents have to be reviewed.

The remaining questions and concerns are many. 

Who is going to do it? What is it going to cost? Who is going to pay those costs? Will an HOA Board be obligated to seek certification? Can an association be sued for not doing it? Is it fair to use association funds to pay the costs of seeking certification? Can an interested buyer (or investor wanting to buy units) individually seek to get the entire development certified? 

Can a management company or other entity that offers their services to an HOA pursue the certification (or can we expect another "cottage industry" within the homeowners association industry context). If so, is whatever income that can be derived from it worth the liability risks? Can the market bear costs sufficient to pay the E and O coverage required for protection in doing this kind of work? Is it a RESPA violation if the manager seeks to recover the costs fees from buyers?

The point of this E-newsletter is to inform you of the coming issues that will have to be resolved. Seeking development-wide certification will likely result in considerable costs (I am hearing $1500 to $5000 but I am sure someone will be charging more than that). So the question becomes, who should pay for the HOA certification process: all owners in the development (making this a budget item) or just those who need the benefit of it? And, another rub ... the certification is not forever - it comes with a shelf life of two years. 

Yes, the plot thickens. At this point there are many wrinkles to be ironed out and more questions than answers! This is a real problem that cries out for a real solution. We need to talk about it.  

Yes, there is a lot more to talk about.

To that end, follow my blogs - accessible from the main page of the website; feel free to send questions - and answers - to me through the website for more  blogs, and stay tuned. This is a topic that will be discussed at an upcoming ECHO East Bay Resource Panel Meeting, it will be addressed in an upcoming ECHO JOURNAL article, and it may be a topic of upcoming seminars put on by ECHO, CACM, and CAI - all of whom can be reached from the resource page of my website.