NEW AREAS OF POTENTIAL BOARD LIABILITY TO CONSIDER - 

     What Do Lease Limitations and  FHA Certification Have in Common?

Let's Start With Lease Limitation Amendments: 

Lease Limitation Amendments: In an upcoming annual Echo Seminar (June 19 - contact echo-ca.org for details) session I will be providing information about lease/rental limitation amendments, the pros and the cons. There is a comprehensive lease article in the Articles section, discussing the legalities. And I will talk about the difficulties in today's economy for getting approval of members, largely because of a very pervasive and widespread fear of losing a home, especially if financing options are curtailed.  A lot of HOAs (boards and members) want to look at these because of the rising fear that lower prices for units will lead to an increase in investor purchases/rentals, and thereby, a rise in the # of rentals. This is a factor that can adversely affect the financing options among other things. And financing options are critical in this recession for refinances and sales of homes. However, the biggest downside of these amendments always has been and still is the fact that they effectively eliminate the pool of investor funds so it is a difficult dichotomy. As a "trade-off", if an HOA is considering such an amendment, and it is a condo association, I believe it important to understand how the board and owners might improve financing options such as FHA and what needs to be done to try and facilitate, to the extent it is feasible, owner occupant funding options. And in today's market, statistics suggest that FHA is probably the most viable source of owner occupant loans. This will be discussed in more detail at the seminar.  Seeking FHA certification may be warranted even though there is a cost attached. As usual, the issues for HOAs cannot be adequately analyzed in a void.

The  "Tie In" to FHA Certification:

I wrote an E-newsletter a few months back providing some information and raising some important questions as food for thought on the subject of FHA certification, especially for condo associations - since spot certification is no longer an option. (See February E-News). Now, it is time for more on the subject. Why should you care? If you live in an association and/or serve on the board, or manage one, you should care, especially if it is a condo association, as lenders including the (FHA-insured loans) are more wary of condominiums than single family or planned development housing. Why do you suppose that is? I am sure it has to do with the fact that the maintenance and much of the other responsibility for what protections are put in place for the housing in a condominium depends on what the boards and owners do in the way of funding expenses, saving money and paying bills. FHA and the secondary mortgage market providers keep putting more and more emphasis on examining what kind of financial planning is in place, and what kind of shape the assessment collections and reserves are in. Although the exact minimum guidelines tend to change periodically, they are getting more and more stringent.

About two years ago, I wrote a lot about minimizing expenditures, tightening belts because of the coming recession. Then, through my work with others to identify problems, I saw that many HOAs were further deferring important maintenance, repair and replacement projects and so I wrote about the importance of NOT deferring important projects. And in conjunction with that, I wrote about tightening up assessment collection practices. Then I wrote about the notion that if an HOA passes a lease limitation amendment that forces people out of their homes, it might encourage more "walk-aways" and more losses due to foreclosure. Now, I think it important to take note of the minimum standards for FHA and other market requirements and beef up the reserves, at least to the required standards. Are you confused yet? HEY, I recognize that is not nor has it ever been an easy balancing act to collect sufficient money to meet the expenses and fund the reserves adequately, especially given that the mindset of Americans (and maybe even more, Californians) which is to put more emphasis on living in the moment than honestly assessing preparing for the future. How many people do you know today that save for big home repair projects? Most have for many years, while money was flowing, depended on the "home equity loan" backup plan. Well guess what, the home equity market has all but dried up. And the other plan of "selling if I cannot afford to make the necessary repairs" is severely hindered by the market problems. So the pendulum has to swing the other way toward avoiding unnecessary spending (focus on needs, not wants), and saving for the proverbial "rainy day." Whether a board should consider seeking FHA Certification to be a need or want may as yet be undetermined, but the way to come to a reasoned decision is, as with any similar question that involves spending, is to investigate, document the findings, and make a prudent decision. And, it rarely, if ever,  hurts to poll the members on their thoughts and opinions.

Board Liability Is Always An Important Consideration: 

Take note: burying your head in the sand, sitting on thumbs and waiting for a miracle or for the other shoe to drop (believing everyone will go down together) is not good planning. And if you are a board member of an HOA or condo association, it's downright inviting to members that are suffering big losses to consult attorneys and look for someone at whom the proverbial finger can be pointed.

So make a plan that involves good collection processes, reasonable write-offs for losses (relating to having to disclose assessment delinquency percentages), some savings plan  for reserves (relating to necessary reserve percentage disclosures), and do not spend those precious reserve funds on some questionable project that does not include maintenance, repair or replacement of the components for which the money is being collected. It's okay to borrow in an emergency so long as any necessary findings are made and recorded and necessary notices go to owners, but it is also important to "preserve and protect the property values" to the extent as that is a recognizable actual duty of boards per most governing documents, and to pay it back. In the past, the property values were not affected so much by what was in the reserves accounts or what the delinquency ratio was, because those were not big issues. Money was flowing including in the area of financing options. But today, the picture is much, much different.

Besides the question of whether FHA or the secondary mortgage markets are going to approve making or purchasing loans in your development (which are important as options for selling or refinancing), there is the question of when a board or association might be sued on a "breach of fiduciary duty" claim as it relates to planning, protecting and preserving assets, and now, what it might do or not do with regard to enhancing or protecting financing options. As explored in earlier newsletters and blogs, the board members have a duty as "fiduciaries" (those who are responsible for managing the assets of others) to act reasonably to protect those assets. Losses to owners who are trying to sell or refinance to avoid losing their homes could lead to lawsuits.

Among other things, is it possible that boards might be sued for failure to seek FHA certification or for refusal to complete lender certification questionnaires? It is. We all know that anyone can sue anyone else for anything in California. The key and relevant question is would they be successful? It is important to understand what is going on and why various decisions by owners, board members and managers may become critical decisions.

Come to the ECHO Seminar on June 19 and learn more about these topics and much more. This is probably the most comprehensive opportunity for board members to educate themselves and find resources of any one day seminar in the State.

THERE IS A LOT MORE TO LEARN ABOUT LEASE LIMITATIONS, COLLECTIONS, RESERVES COLLECTIONS AND INVESTING, ETC.

For more, go to "Publications", specifically the Assessments, Reserves and Lease Limitations Primers. If you purchase 4 Primers, you can get a fifth one free! Just place the order and then email me and tell me the name of the Primer you want for free.