Bad idea: bill targets federally-insured loans to pay for years of deferred condo maintenance

HOA industry lobbies Congress for access to FHA loans for exterior repairs

How will forcing owners to take on additional debt ‘help’ provide ‘safer’ housing?

By Deborah Goonan, Independent American Communities deborahgoonan@gmail.com

This post is an important alert for U.S. homeowners and property rights advocates across the nation. The HOA industry’s national trade group, Community Associations Institute (CAI) is working with two Congressional Representatives on a federal bill, which the organization claims will “help” low-income condo unit owners to pay for special assessments and catch-up reserve fund contributions.

The bill is entitled SAFER Condos Act of 2022, Securing Access to Financing for Exterior Repairs in Condos Act of 2022 (HR 7532 – 117th Congress (2021-2022)).

As usual, lawmakers have created a bill title that is somewhat vague and misleading. This legislation does not directly address building safety standards. Truthfully, if Congress considers this bill as currently drafted, it won’t make condos ’safer.’

The second half of the title reveals the true intent of the bill, which is to find a way to exploit a federal government housing program to finance exterior structural repairs to condo buildings that have suffered years, if not decades, of deferred maintenance. In essence, CAI hopes that HUD (US Dept. of Housing and Urban Development) will help condo associations find the cash to pay for multimillion dollar building renovations, despite the fact that the majority of HOAs have failed to manage their finances and, as a result, have little or no cash reserves.

According to a recent news release from CAI, the SAFER Condos Act would allow certain low-income condo owner occupants to borrow money to pay huge special assessments imposed by their condominium HOAs.


The SAFER in Condos Act will allow condominium homeowners to combine a special assessment to fund condominium building structural repairs with existing mortgage debt and secure a new 30-year mortgage loan insured under the FHA home rehabilitation program. The legislation also grants condominium homeowners access to the FHA Property Improvement Program to finance a structural repair related special assessment over a term of 20 years.

The SAFER in Condos Act is intended to reduce upfront costs to condominium homeowners facing special assessments to finance necessary building repairs. 

Federal Legislation Supports Condo Structural Repairs, Helps Owners Finance Special Assessments by C. Scott Canady | Apr 19, 2022 (Community Association Institute)


Specifically, CAI legislative action committee officials have convinced two Democratic House Representatives (Charlie Crist and Debbie Wasserman-Schulz) to propose amending current federal law governing financing of housing repairs and renovation. If amended as proposed, condo owners facing mandatory special assessments would be pressured by their HOA to refinance their mortgages with cash-out loans, or, alternatively, take out brand new loans backed by the Federal Housing Administration. These are commonly known as FHA loans.

Taking on substantial debt won’t help homeowners

First, I want to emphasize the fact that the SAFER Condos Act provides no direct cash assistance to low-income condo unit owners. There will be no grants or public assistance made available to help shore up crumbling foundations, replace failing roofs, or waterproof exterior siding, windows or doors.

This bill does not provide funding to preserve affordable housing. Nor does the bill propose the use of financing for repair and replacement of plumbing, electrical, heating or air conditioning systems. It focuses on ”exterior” repairs.

Next, I want to remind readers that state laws in the US empower HOAs to impose liens against condo owners who fail to stay current on their HOA fees. Furthermore, a condo association has the legal right to foreclose any lien for unpaid assessments, meaning that a cash-strapped owner can lose their home — and potentially most or all of their equity — if they cannot afford to pay huge HOA fees (special assessments) for expensive building repairs.

From an owner’s perspective, they have been led to believe that their monthly condo fees will be used for both ongoing maintenance and future repairs. But in the past two decades, a growing number of condo owners have discovered that their condo association lacks the money it needs to make extensive building repairs.

HOA-industry supporters of HR 7532 argue that FHA loans could help owner-occupants, who are qualified borrowers, to pay their HOA special assessments upfront, then spread out their increased condo maintenance costs over the next 20–30 years.

But CAI fails to mention that many condo owners, who are already struggling to make ends meet in an uncertain and inflationary economy, would face enormous pressure to substantially increase their monthly housing expenses with a combination of FHA loan payments and monthly condominium fee increases.

And the reality is, even if owners agreed to borrow money against their condo’s equity — in order to avoid losing their home to foreclosure by the condominium association — they could still end up losing their home within a few years. That’s because HR 7532 does not change current reality. The inability to repay an FHA loan can result in lender foreclosure, and falling behind on future HOA fees can still lead to HOA foreclosure.

Owners may find that the best solution is to sell their condo unit to any willing buyer, even if the sale price is much lower than they had hoped.

Unfortunately, for many low-income and even middle-income owners, taking on new loan debt will merely delay the inevitable loss of their unaffordable home to either resale or foreclosure.

But there’s an even deeper, more systemic problem for condo owners. Millions own units in aging buildings or housing communities that have structural defects that have yet to be discovered or revealed to owners.

CAI’s murky guidance on answering Fannie Mae and Freddie Mac lender questionnaires addressing structural safety, reserve fund balances

CAI recently offered a publication with guidance for condo HOA board members. Here’s a screenshot of the cover page. The online guide states that Fannie Mae and Freddie Mac questionnaires are seeking disclosures of structural deficiencies, low cash reserves, and the looming threat of large special assessments.

Source: caionline.org

CAI’s message: to avoid directly answering structural safety and reserve funding questions on new Fannie and Freddie condo questionnaires. Their advice is to provide documentation to lenders, and allow them to decide if the condo or co-op association belongs on a list of potentially unsafe or high-risk community associations.

Hard to believe? Well, here’s an example from their FAQs:

What answer do we give if we cannot give a yes or no answer? Lenders push back on the “unknown” or “unable to answer” as a response.
A: It is appropriate to provide documentation like board meeting minutes, building/façade inspections, maintenance schedules/reports, and reserve studies and schedules so the lender may review the materials and answer the question on their own.

DETERMINING CONDO OR COOP ELIGIBILITY FOR MORTGAGES BACKED BY FANNIE MAE AND FREDDIE MAC
A GUIDE FOR NAVIGATING THE NEW TEMPORARY REQUIREMENTS FOR CONDOMINIUMS AND HOUSING COOPERATIVES
FEBRUARY 17, 2022 (Community Associations Institute)

Most of the FAQs advise condo and co-op board members to consult an attorney.

Bottom line, if Fannie and Freddie don’t want to back condo loans, that puts more pressure on FHA to pick up the slack. That’s why CAI is pushing the SAFER Condos Act.

But it should be clear to astute observers that, if FHA were to become the lender of choice for poorly managed condo associations with unsafe structures, the only winners would be HOA-industry management companies, and the construction and maintenance vendors who are awarded multimillion dollar contracts for long-delayed repairs.

It’s painfully obvious that CAI members, the majority of which earn their income from homeowner paid HOA fees and big construction and maintenance contracts, would reap the benefits of FHA loan cash borrowed by cash-strapped condo owners.

Condominium associations might also benefit from reduced HOA collections burdens, since special assessment would effectively be collected by lenders as part of the FHA loan.

Investors, who often end up buying the majority of units from financially distressed homeowners, would definitely benefit from acquiring units in communities with repairs and renovations paid for by previous owners.

But homeowners who occupy their condos, as well as taxpayers, will bear the brunt of the risk of propping up unsafe or insolvent condo associations.

Read and track the bill:


Link to Congressional bill: HR 7532 – 117th Congress (2021-2022)
Short Title: SAFER in Condos Act of 2022
Securing Access to Financing for Exterior Repairs in Condos Act of 2022

Text as introduced by Rep. Charlie Crist (D-FL-13) in April 2022
, Co-sponsored by Rep. Wasserman Schultz, Debbie (D-FL-23)


DEEP DIVE (Further reading)

About FHA

FHA insures relatively higher risk loans, and finances this risk by charging borrowers for Private Mortgage Insurance (PMI), which is added to each monthly mortgage payment.

By extension, if a condo owner borrows money to pay a huge HOA special assessment, that owner will be paying PMI in addition to interest and rising regular condo fees.

During times of recession, the FHA has backed a higher percentage of mortgage loans for first-time home buyers, and re-fi loans for minority homeowners. However, very few of those loans have financed condominium units.

Fact: FHA insures only 12,000 loans for multifamily properties. CAI estimates that there are approximately 105,000 – 140,000 condominium associations in the US. That means only a very small fraction of condominium properties even qualify for FHA loans.

According to the Congressional Research Service publication FHA-Insured Home Loans: An Overview, as of January 2022, FHA will issue loans to buyers or homeowners with FICO scores as low as 500, and with total debt-to-income ratios of up to 43%. Borrower down payments (or equity) can be as low as 3.5%.

FHA loans are generally available only to owner-occupants. Also, according to CRS, ”FHA-insured loans may be used to purchase one-family detached homes, townhomes, rowhouses, two- to four-unit buildings, manufactured homes, and condominiums. FHA-insured loans may also be obtained to build a home; to repair, alter, or improve a home; to refinance an existing home loan; to simultaneously purchase and improve a home; or to make certain energy efficiency or weatherization improvements in conjunction with a home purchase or mortgage refinance. Different or additional requirements may apply for certain property types or loan purposes.”

CAI trade group members hope to capitalize on FHA re-fi and improvement loans for repair of existing condominium buildings. These loans would not be used to finance repair of individual condo units.

More details about FHA loans from Investopedia.

FHA mortgage defaults

FHA borrowers have a higher than average rate of default, due to the their relatively lower equity position and generally lower level of cash reserves. FHA loans can help buyers and homeowners to attain and maintain homeownership, but only if the borrower is able to repay the mortgage, and stays current on taxes and home insurance payments.

Economic recession and personal financial crisis can test the ability of many homeowners to stay current on their home loans, but especially owners who have limited incomes and little to no equity in their homes.

FHA offers a bit of a safety net. When an owner defaults on an FHA loan, they first enter a Pre-Foreclosure Sales Program. This allows the owner to sell their property to another buyer for less than the amount owed on their mortgage. The catch: the owner has only four months to sell their home to a new buyer to avoid lender foreclosure.

Because FHA guarantees loans, the lender gets paid the total amount of the mortgage owed, even if the pre- or post-foreclosure sale price is lower than the current mortgage balance. Thus, FHA lenders don’t assume much risk in issuing loans, as long as those loans meet FHA standards. Since FHA agrees to accept insufficient sales proceeds, it effectively writes off the remaining mortgage debt. As long as FHA’s total collection of mortgage insurance premiums (PMIs) offsets the cost of mortgage defaults, the program remains solvent.

But when a large number of borrowers default in a short period of time, and falling home prices lead to sale proceeds that don’t cover the total amount of outstanding loans, FHA is forced to increase PMIs for future borrowers. That includes anyone refinancing their FHA loans to take cash out for improvements (or special assessments).

At the time of this post, home prices are still rising in many markets. But some finance and real estate experts say that a recession is looming, which could have a negative effect on home values. As in the previous recession, borrowers with FHA backed loans could find that they owe more on their mortgage than their house is worth.

Sources:

HUD says FHA delinquencies “positive sign” as it weighs premium pricing March 2, 2022, 6:30 pm By Maria Volkova (HousingWire)

What Happens When You Default on a FHA Mortgage? By Tony Guerra, SFGate

History of FHA bailout

The SAFER Condos Act will prove to be a hard sell in Congress, especially after taxpayers funded a $1.7 billion bailout of FHA in 2013. The year marked the first time in the agency’s history that it could no longer fully guarantee all of its defaulted loans.

In the height of the housing slump, between 2007-2009, FHA became the default insurer of housing loans when lenders all but stopped underwriting new mortgages. By 2009 FHA insured up to 70% of new mortgages.

True, the FHA bailout was minor in relation to the $187 billion used to prop up Fannie Mae and Freddie Mac. But I see no compelling justification to set FHA on another path to insolvency.

Source:
FHA to get $1.7 billion in its first taxpayer-funded bailout By Jim Puzzanghera SEPT. 28, 2013 12 AM PT (LATimes)

Rising insurance premiums, policy cancellations threaten condo association stability, too

A related problem — many insurers are raising premiums or cancelling policies on housing communities and buildings they classify as high risk for structural failure. In Florida, where condominiums are plentiful and showing their age, insurers are now requiring that condo associations address deferred maintenance and conduct more frequent building recertifications.

I expect to see similar rate hikes and underwriting requirements for condos and co-ops across the US within the coming year.

Insurance rates spike after Florida lawmakers fail to address condo safety May 4, 20224:29 PM ET Heard on  All Things Considered (NPR)

The head of Florida’s Association of Insurance Agents, Kyle Ulrich, says insurance companies are now requiring condominium buildings over 15 years old to be recertified before their policies are renewed. And he says the cost of insurance is going up dramatically.….
Ulrich and others say in some ways it doesn’t matter that Florida has failed to adopt new rules on condo safety because the insurance industry is already doing it on its own. Along with steep price increases, many condo associations are now being required to carry out deferred repairs and improvements, costs, Ulrich says, that may be hard on retirees and others on a fixed income.

Insurance rates spike after Florida lawmakers fail to address condo safety May 4, 20224:29 PM ET Heard on  All Things Considered (NPR)
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