By Aldo Svaldi
Condo developer Jason Sherrill says he would prefer to hand keys for his new units to families, but tighter rules from the Federal Housing Administration have him selling to investors instead.
Stricter FHA certification requirements for condo developments have made most condos ineligible for FHA-insured mortgages, the primary source of condo financing since the downturn.
"They really force people like me to build and turn them into rentals," said Sherrill, chief executive of Landmark Solutions in Windsor.
FHA-insured mortgages have a low 3.5 percent down payment and more flexible underwriting rules. That has made them popular with entry-level buyers, who are also drawn to more affordable condos.
Certification is designed to protect the FHA, a part of the U.S. Department of Housing and Urban Development, from sharp drops in value that result when too many units convert into rentals or go into foreclosure.
"HUD/FHA is trying to manage risk to the insurance fund while still providing access to home ownership for low- and moderate-income borrowers, particularly for first-time homebuyers," said Rick Garcia, Denver-based administrator for HUD's Region 8. "It's a delicate balancing act, but HUD continues to consider public input into the process."
A depleted FHA would harm the markets, not to mention taxpayers, the argument goes. But critics charge the FHA's actions are harming those they're intended to help.
"It is an overreaction and it is hurting the market," said Jerry Orten, a Denver attorney and spokesman with the Community Associations Institute, a trade group for homeowners associations that is pushing the FHA to ease up.
HOAs are responsible for pursuing certification of developments they represent.
Rep. Ed Perlmutter, a Jefferson County Democrat, wrote acting FHA commissioner Carole Galante last month after getting numerous complaints from constituents.
Only 8.4 percent of 25,000 condo developments nationally that have FHA certifications expiring before Sept. 30 have recertified, Perlmutter wrote in his letter. Communities that have tried to recertify in recent months have been rejected at a 38 percent rate, due in part to the complexity of the rules, he added.
"In tightening down on these things, they have made it more difficult on everybody," Perlmutter said in an interview.
To qualify for certification, more than half of the units in a development must be owner-occupied, and no more than 15 percent can be behind 30 days or more on their HOA dues.
Those requirements aren't necessarily new. But the FHA is taking a stricter interpretation on them, Orten said. For example, bank-owned properties used to be excluded from the counts. Now they count against ownership.
A change that disallowed second homes to be counted as owner-occupied has also hurt some developments.
The Lakeshore Condominiums in Loveland are popular with buyers who spend their winters in warmer climates such as Phoenix, Sherrill said.
"The government decided on a whim that second homes can't be quantified as owner-occupied," he said. "All of a sudden a project that was in compliance wasn't in compliance."
That hurts sales by locking out buyers who thought they had financing, Sherrill said.
Even when projects might otherwise qualify for certification, condo associations are declining to do so. A new liability clause subjects volunteer directors to $1 million fines and 30 years in prison if they get the information wrong. Condo developments, which had to get certified just once, must now do so every two years, increasing the liability that association's face.
Losing certification leaves condo owners with a much more limited market when it comes time to sell and excludes buyers who can't afford larger down payments.
"We don't have certification, and that has hurt all of the owners who are here," said Margie Valdez, president of the condo association for the Beauvallon in Denver.
Sellers can hold out for buyers who qualify for conventional loans, with their larger down payments of 10 to 20 percent. Some developments are seeing those buyers show up lately, given the shortage of homes available for sale.
In some developments, local credit unions are trying to fill the financing gap. But that isn't the case everywhere, and conventional buyers may be scared off.
Other options are to sell to investors who will convert the unit into a rental or, if a buyer doesn't show up in time, to let the property go into foreclosure. Both of those "outs" put condo communities deeper in the hole and make recertification less likely, what Orten and others call the "downward spiral."