By Beth Grimm
Question – can we sue an association that does not have FHA Approval. The answer: anyone can sue anyone for anything and whether there is any chance of success depends on whether the party being sued had a duty, breached it, that breach caused losses and the losses can be proved.
Here, the truth is that Condo Associations don’t all qualify for FHA approval and even if they did that does not automatically mean there is a viable cause of action against a Board for not applying. Here is some background on the subject.
Everyone wants to sue if they can’t get what they want. I’m getting a lot of emails from a lot of owners who are trying to sell, potential buyers that are trying to buy, and realtors who are trying to get some work, about what anyone can do if the Condo Association doesn’t get FHA approval. Of course that means that there will be no FHA-Backed loan available and that is bad news since, according to CAI (Community Associations Institute) – 1 in 3 loans made on condos are with FHA financing.
Here’s the deal:
Some boards refuse to apply. Why? The answer is various reasons. Maybe they don’t want to spend the money for the application process when there is only one condo for sale in 100 (the cost for the application process is costing in the range of $1500 to $5000 to have an experienced practitioner – not necessarily meaning an attorney – they might be charging more??) do the work. And without the experienced helper who knows how to navigate the hurdles of getting approval, the difficulty level rises – or so I hear.
Some boards refuse to apply because they believe there isn’t a chance in heck the association will pass, and they don’t want to waste money. The criteria is being fairly widely circulated, and it is tight! Condos to some degree are being pushed out of the market by FHA criteria, which is also mostly used as a guide for the secondary mortgage market providers, meaning they shy away from Condo Associations too.
Some boards apply and get turned down.
Some boards apply and get approval! These tend to be the healthier, more professionally run Condo associations, I believe, and those that are new tend to meet the criteria because if they don’t, the developer won’t be able to market the condos, so they try harder!
I don’t blame anyone of course for the mess. I blame almost everyone, … “us”. The recession and economic slowdown was fueled by many things, overextension of credit for equity loans and leveraging, credit card debt, loss of jobs, and – yes, I’ll say it – to some degree the need for instant gratification which in the worst cases evolves into greed and entitlement. And, of course, in great part by bad loans – which was what it took to some degree to keep the California housing market moving and the lenders in profits – until the flow stopped of course. What happens when people or businesses get burned? They take a big step back away from the flames. That is what FHA did.
Slowly the flames are being fanned, and CAI is in the midst of it, working to improve the capability of Condo associations to get loans. Here is a quote from a paper recently put up on the CAI-National (Community Associations Institute) website after a survey of the success (or failure) of Condo Associations to qualify for FHA approval was conducted. Check out the CAI website for more information on their “Mortgage Matters” effort. Here is a quote from the paper signifying the results of their survey and the main hurdles to getting approval. As you can see by the results, the odds of getting FHA approval are weighted against Condo associations because of the various and common problems experienced by the Condo associations across the country.
“CAI RELEASES SURVEY ON FHA CONDOMINIUM APPROVALS
A report issued by the Community Associations Institute (CAI), shows that condominium associations are struggling to meet lending requirements set by the Federal Housing Administration in the wake of the housing crisis, leaving many condo associations without access to affordable financing. According to a survey of its members, close to half of all condo associations report that they are unable to qualify for FHA financing. FHA insured mortgages currently account for more than one in three condominium purchases.
The survey was conducted by CAI in March of 2011, and gathered data on over 7,500 condominium units in 34 states. The survey sought data on the ability of associations to meet the requirements set by FHA as well as their experience with the approval process.
According to the survey, only 57% of condominium associations were able to obtain approval with their initial application, with a total of 75% of associations eventually getting FHA approval. Although the number of associations qualifying for FHA is substantial, there are still millions of units that have been cut off from the FHA program.
Condominium associations report that the reasons for rejection by FHA were inadequate contributions to reserves (26.5 percent), leasing restrictions (22.9 percent), assessment delinquency rate (22.9 percent), insufficient insurance coverage (21.7 percent), less than 50 percent owner occupancy rate (16.9 percent), and pending litigation (10.8 percent).”
It’s an uphill battle folks. It would be my hope that Association boards who are trying to cope with the many other challenges, such as the foreclosures and walk aways, will not be picked off by snipers for failure to get, or try to get, FHA approval. That said, it is a benefit for all members when the Association can get the approval. It makes financing for sales, including short sales (remember – they do turn over ownership), and refinances easier for anyone who needs the benefits of FHA backed loans. Financing money is hard to come by and the FHA backed loans are one of the biggest providers at this time. So Boards, it is good to at least weigh all options before you just say no.