How To Understand the Federal Housing Administration Financing Guidelines and the Fiduciary Duty of Condominiums

The Federal Housing Administration (“FHA”) was created by Congress in 1934. It became part of the Department of Housing and Urban Development’s Office of Housing in 1965. Condominiums that are currently certified must be recertified every two years. The new FHA rules apply to condominiums in New Jersey, New York, Pennsylvania and all other states. These new rules do not apply to home-owners associations. The FHA insures loans made by FHA-approved lenders all across the country. In fact, the FHA insures in excess of 30 percent of all new mortgages at last count. The FHA doesn’t make mortgages — at least not directly. Rather, it insures lenders against the possibility that a borrower may not make his payments as promised. The availability of this insurance enables lenders to make loans and extend credit to a broader class of borrower, allowing owners within a condominium to market their homes to more potential buyers. Without FHA insurance, banks could very well loan to only those persons with sufficient means to make a large down payment on the unit. The FHA will insure only certain loans — those that meet FHA requirements.

On June 12, 2009, the FHA announced a new, much stricter, approval process for condominiums to be eligible for FHA financing. The FHA will no longer approve mortgages on condominium units on a spot, loan-by-loan basis. Now the entire project must be cleared by the agency (i.e., certified) before a buyer can purchase a unit in the community with a government-insured mortgage or an owner can trade in his loan for a less expensive one backed by the FHA. The new regulations are set forth and/or referenced two documents: Mortgagee Letter 2009-46A, dated Nov. 2, 2009, and Mortgagee Letter 2009-46B, dated Nov. 2, 2009. Under the new regulations, which became effective on Feb.1, all condominiums previously approved for FHA financing will have to be reapproved or FHA financing will not be available. According to the FHA as of June 30, 32,000 condominiums have been certified. Community Associations Institute estimates that roughly 40 percent of the nation’s 305,400 planned unit developments are condominiums. If so, roughly 122,000 condominiums exist in this country, and only 25 percent are currently on the FHA’s approved/certified list. That is obviously an enormous gap. Condominiums, and their managing agents and attorneys, must be aware of the mortgage market and how tightened underwriting standards will affect association operations and property values.