Saturday, October 22, 2011

Real Estate | New rule a major condo headache | Seattle Times Newspaper

Real Estate | New rule a major condo headache | Seattle Times Newspaper
FHA says the rule changes it has adopted, which focus on project budgets, insurance and financial reserves, have been prudent and are designed to avert losses from delinquencies and foreclosures. But the agency confirms that thousands of condo projects have failed to obtain or apply for required recertifications under the new rules.

Out of approximately 25,000 condo projects nationwide with expiration dates for FHA eligibility between last December and Sept. 30 of this year, only 2,100 — just 8.4 percent — have been approved or recertified by the agency, according to Lemar Wooley, an agency spokesman.

These rules force condo associations to collect assessments aggressively and fund reserves, among other things. There are many signs pointing to the same conclusion: many condo associations are in significant financial distress.


Anonymous said...

But why do they just deteriorate into slums instead of reorganizing in bankruptcy?

Evan McKenzie said...

Bankrupting a condo association is not a simple process. The end result can be that the owners get saddled with the association's debt or judgment. I have been doing a study of condo association BKs and it turns out that things can get quite messy. To do a Chapter 11 reorganization the plan has to leave the creditors at least as well off as they would be in a Chapter 7 liquidation. In a liquidation the association's assets would be divided among the creditors. What are the condo association's assets? Why...the ability to collect assessments! And potentially the entire judgment or debt could be collected that way if the owners were forced to pay it off by special assessment, on pain of losing their units. So a BK judge and trustee could conceivably conclude that the only fair reorganization would result in paying off the whole debt. So..what's the point of going bankrupt if you can't really discharge the debt?

Tyler Berding said...

That's true of course--the reason community associations don't go bankrupt is because courts have held that their debts in most cases must be passed through to the members by way of special assessments levied by the Trustee in bankruptcy who inherits the powers of the association. So essentially each member's unit is security for the association's debts. And, of course, the various lenders will assert their priority over the units as security for their mortgages, leaving little owner equity in most cases. So what would happen? The owners would walk and the lenders and the creditors would fight it out over the bones.

As for the new FHA certification rules, It is likely that few board members will be willing to "certify" the financial health of their association given the draconian penalties for making a mistake--even if the project is otherwise qualified. That, plus the steady criticism levied against these volunteers makes it more likely that many associations will go rudderless as board members resign and no one will volunteer to take their place. Who needs the grief?

The critics can then take their issues up with the Receivers who the courts will appoint to take over management, re-organization, or liquidation of these projects. Unless, of course, the critics would like to volunteer to run the place. The line forms at the rear.

Fred Pilot said...

So we have a Sarbanes-Oxley of sorts for condos. Perhaps that's a good thing considering that condos pose substantial investment risk to purchasers who clearly aren't the most suitable to assume it -- many if not most of them first and last time buyers. The former in particular, since they have no experience purchasing real property and are thus fairly considered unsophisticated investors. The latter because they are typically retired seniors on fixed incomes.

Not only does better financial oversight of condo transactions protect purchasers, it also protects lenders.

Compliance with the FHA certification rules may seen draconian compared to past practice. But that's where condo counsel earn the big bucks to ensure the condo boards they advise are in compliance.

Anonymous said...

"So essentially each member's unit is security for the association's debts."

Although this specific discussion is about condominiums, isn't the same true about associations composed of single-family houses?