June 30, 2011
FHA Issues Guidelines for Condominium Project Approval and Processing
Written By: Ronald L. Perl and Jonathan H. Katz
On June 30, 2011, the Federal Housing Administration (FHA) issued its long-awaited Condominium Project Approval and Processing Guidelines for condominiums seeking approval for FHA mortgages. These guidelines are intended to provide a single source of information as well as to consolidate, update and clarify the FHA’s previous policies and procedures for condominium project approval. However, several new requirements, including a mandatory certification of compliance, are bound to create further confusion and have elicited serious concerns.
In some areas, the new Guidelines do provide greater clarity and flexibility for the entire condominium approval process. With these Guidelines, the FHA responded to numerous concerns and recommendations from various entities, including the Community Associations Institute (CAI). The new Guidelines also allow Housing and Urban Development (HUD) Home Ownership Centers (HOCs) greater flexibility in approving applications and projects that do not meet all of the specific requirements under the Guidelines. However, several of the updated provisions in the Guidelines create new and potentially troubling issues for condominium associations seeking FHA approval.
A few problematic areas are highlighted below:
- An entirely new requirement that the association, management company or attorney sign a certification that the association is in compliance with all state and local condominium laws, and all FHA approval requirements. The signatory will also have to attest that all information is true and accurate and that the signer has no knowledge of any “substantial disputes concerning unit owners, rights, privileges or obligations.” By signing the certification, the submitter is under continuing obligation to inform HUD of any material changes. These attestations are subject to criminal penalties including up to $1 million in fines and 30 years in prison.
- A requirement that the association provide information and documentation regarding any special assessments or pending litigation (other than collection or foreclosure actions) together with an opinion as to the potential effect of such assessment or litigation on the unit owners.
- A requirement that the association, management company (if applicable) and each unit owner must maintain certain insurance coverage.
- A requirement that no more than 15% of the units be delinquent for a period of 30 days or more.
- The inclusion of bank-owned (or REO) properties in the calculation of the association’s delinquency criteria.
- Disallowing approval of projects where certain deed restrictions may affect the ability of a buyer to freely transfer the property.
Some examples of greater flexibility in the Guidelines for the approval process include:
- An exemption for associations that do not meet the 15 percent of units/30 days delinquent in assessments threshold, which may be met by meeting certain criteria including having budgeted for delinquencies and having no more than 20 percent of units in arrears.
- An exemption for associations that contain up to 35 percent commercial-space.
- An exemption to the requirement that no more than 10 percent of units can be owned by any individual or entity to account for certain affordable housing.
- Easing of an association’s ability to impose certain rental restrictions (although certain problematic restrictions regarding rentals are still applicable).
You can view copies of the new Guidelines and other information by clicking on the following links:
- Condominium Project Approval and Processing Guide
- FHA Mortgagee Letter 2011-22
- FHA Guidelines Implementation Schedule
For more information on this issue, please contact one of our Community Associations attorneys:
Hill Wallack LLP's Community Associations Group
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This article provides information of general interest and is not intended, and should not be used, as a substitute for consultation with legal counsel. Any questions regarding the specific issues raised in this article should be directed to the authors or to your contacts at Hill Wallack LLP.