Friday, November 11, 2011

CAI criticizes FHA standards for condo loans

From a recent CAI Press Release:
CAI Applauds Congressional Input on Mortgage Issues
FALLS CHURCH, VA, NOV. 10, 2011—Congressional leaders are expressing serious reservations about Federal Housing Administration’s (FHA) mortgage-approval policies for condominiums—policies that are the source of mounting confusion and angst for condominium boards, homeowners and real estate agents nationwide.
Community Associations Institute (CAI) says these policies are preventing many potential buyers from obtaining FHA-backed loans to purchase homes in those communities, putting entire condominium associations at risk and further worsening the already dismal residential real estate market.
While acknowledging the need for thoughtful and financially sound lending criteria, the 31,000-member organization has expressed public concern about past FHA lending guidance that has created continued “confusion and frustration” in the marketplace. That’s why CAI sought to bring Congressional attention to the issue.
“There seems to be an invisible barrier between FHA and condominium associations,” Sen. Scott Brown (D-Mass.) said in a recent letter to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD). FHA falls under HUD’s jurisdiction.

I think there is no doubt that FHA, and Fannie and Freddie, are taking a harder look at loans to buy condos. Why wouldn't they? Many projects are in big financial trouble due to owners being in foreclosure and not paying assessments, and banks holding units and simply refusing to pay assessments. Add to that the fact that these building need maintenance and the reserves are not there, typically, and even more so now that solvent owners are getting squeezed harder than ever. But if FHA is going to guarantee the loan, or if Fannie or Freddie are going to buy the loan, they have to be careful. The taxpayers have already sunk a fortune into Fannie and Freddie since 2008 to pay for their purchase of bad mortgage backed securities. They don't want to get stuck with bailing out the nation's condo associations, especially if the entire institution is of questionable sustainability (as I have been arguing for years.)

Oh, and one suggestion for CAI: Scott Brown is not a Democrat. He is a Republican. Maybe you should correct that.


Anonymous said...

How about a couple more for CAI?

How many lawsuits have been provoked by CAI attorneys and management companies that fail to deliver records of the condo corporation to members that have requested it?

Why should the federal government sponsor financial crimes in these organizations by enabling unwitting prospective purchasers to become new victims in these places?

Since CAI is such a strong proponent that choice exists and everyone is free to make a choice, why don't the buyers choose another financing option or choose a different place to live? If you don't like it then don't buy there, right?

Why not have a congressional study into the practices of CAI member management companies and attorneys within these condo corporations?

Anonymous said...

As Professor McKenzie said in a recent Urban Institute video: 

"The condominium…it's kind of almost a fictional real estate interest. These things can only exist by statute…Condominiums can only exist where statutes authorize them to exist. So we've had them since about 1960."

As Steven Siegal wrote back in 2007:

 "Before 1960, the condominium form of ownership was unknown in the United States. Beginning in the early 1960s, the states began enacting statues authorizing the condominium form of ownership, principally in response to the enactment of the National Housing Act of 1961, which extended Federal Housing Administration mortgage insurance to the condominium form of ownership. See McKenzie, supra note 2, at 95. By 1967, all fifty states had enacted condominium statutes. Id. at 95–96." ("The Public Role in Establishing Private Residential Communities." Urban Lawyer. Fall 2006. Footnote 23 on page 869.)

Much of Tyler Berding's writings about the un-sustainability of the current model of condo ownership should be required reading by our policy makers; as long as they can filter out the self-serving propaganda that ignores the role of his industry in creating the problems.

Since there is no common-law basis for condominiums, condominium ownership can only exist by statute, maybe it's time to think about prohibiting condominium ownership -- or at least any new construction of condos. It's a failed legal fiction that cannot work, and has caused a lot of harm to both the individuals involved and the economy as a whole.

What would replace condo ownership? I'm not going to pretend to have an easy answer for that one. The two alternatives that come to mind are

(1) the co-op model, where the residents share a single mortgage
(2) turn the owners into renters

although I'd love to hear other ideas.

Anonymous said...

“There seems to be an invisible barrier between FHA and condominium associations,”

And what exactly is the problem?

Anonymous said...

Since there is no link to the CAI press release, I'll use this recent news story about FHA guidelines for condominium loans as a guide:

It is very important for condos to have FHA approval because many of your condo buyers are first-time home buyers who are looking to go FHA.
Some FHA/HUD potential issues that have an impact on the FHA approval process are:
* The complex may not be HUD approved
* A single owner may own more than 10% of the units.
* More than 15% of the owners are more than 30 days behind in their association fees.
* More than 5% of the total space of the complex has non-residential use (commercial space)
* Less than 50% of the units are owner-occupied
* Projects where the homeowner association owns/operates a non-incidental business.
* The association has less than 10% of the total operating budget in reserves.
* There is pending litigation
So if you are selling or thinking of selling your condo, this would be a good topic to bring up with your homeowners association. The more you can be attractive to a buyer, the better.

I'm not an expert on the subject, but if the CAI is so concerned, they can do something about bullet points # 3 ("More than 15% of the owners are more than 30 days behind in their association fees.") and # 8 ("There is pending litigation").

- "More than 15% of the owners are more than 30 days behind in their association fees."

By adopting the "priority of payments" scam accounting system as policy, in which assessment payments are applied to arbitrary fines and fees, associations artificially inflate the level of delinquencies.

Instead of complaining that

Second, the phrase "when you use the priority of payments scam" intentionally implies that CAI somehow collects association assessments, charges fees, etc. Of course that is totally false and intentionally misleading. CAI does none of those things and through our education programs teaches none of those things. But I have to admit it is an effective way to hurl an untrue fact-like statement to make an emotional argument when you don't have any other logical or factual leg to stand on.

perhaps the CAI should adopt a policy that its members will not engage in such sleazy and unethical accounting practices. But that won't happen.

Even though such policies harm the association and the individual homeowners by lowering property values and making it harder to get FHA loans, the industry professionals -- property management companies and HOA law firms -- profit immensely from this practice. And we know whose interests the CAI protects (hint: it's not the homeowners).

- "There is pending litigation"

I'm not sure what other business is engaged in the practice of regularly litigating against its members as much as CAI members are. Perhaps the CAI should encourage its membership to stop engaging in excessive litigation for trivial reasons. But again, this would cut into the profits of the CAI's membership.

--- continued in next post below (due to 4,096 word limit) ---

Anonymous said...

--- continued from previous post ---

But although not mentioned in the news story I linked to at the beginning of the previous post, I suspect that -- like any organized crime syndicate -- the CAI's membership is more concerned about getting its percentage of home sales via private transfer fees.

"The Federal Housing Finance Agency (FHFA) is proposing to issue a Guidance, 'Guidance on Private Transfer Fee Covenants,'… that the entities it regulates should not deal in mortgages on properties encumbered by private transfer fee covenants. Such covenants appear adverse to liquidity, affordability and stability in the housing finance market and to financially safe and sound investments." (Privatopia Papers blog. August 17, 2010).

Where permitted by state law, associations frequently use such fees at transfer to fund reserves or other capital contributions, which strengthens the communities financial position and where the benefits accrue to all the homeowners within the community. (Tom Skiba. August 17, 2010 at 12:10 PM CDT)

An enormous amount of those fees get shuffled off into the pockets of lawyers and property managers. Some of that goes for necessary activities. Some goes to pay making handicapped children use the back door, forcing people to tear down their kid's swing set or their political signs, or some other preposterous and antisocial enforcement action. Sometimes it goes to pay for elections that would shame a banana republic and quasi-judicial kangaroo courts. (Evan McKenzie. October 09, 2009 at 6:49 PM CDT)

Like policies that conflate assessments with fees and fines, or encourage litigation for trivial amounts and reasons, private transfer fees have a negative effect on property values and the ability to get a loan.

But they are extremely lucrative for the CAI's membership.