Tuesday, November 24, 2009

FHA Guidelines Problematic for Homeowner Associations

On November 6, 2009, the Federal Housing Administration (FHA) issued new guidelines relating to condominium and homeowner associations.  The two documents: HUD Mortgagee Letters 2009-46A and 2009-46B set in place new guidelines relating to FHA mortgage insurance requirements.  Set to begin effective February 1, 2010, these requirements present particular problems for homeowner associations struggling to survive in todays recessionary economic climate.

With national unemployment at 10.2 percent, and higher in several metropolitan areas of the United States, prime loan foreclosures eclipsing (in real dollars) new and existing home sales many homeowner associations Accounts Receivables/Aging Detail Reports are beginning to look like a Who's Who list of late payers within the neighborhood.  Under the newly adopted proposals, it will be difficult for homebuyers to participate in the FHA mortgage insurance program if total number of individual units in arrears exceeds 15 percent.  Homes within a community association of approximately 200 units would not be eligible to participate of a mere 30 units were in arrears or delinquent at any given time - regardless of the number of days (30, 60, 90, or greater).

With foreclosures and individual bankruptcies skyrocketing within the homeowner association communities, many HOA's will be left with no alternative but to discharge (write-off) ever increasing amounts of delinquencies.  Otherwise, how is the association supposed to address the time lags associated with foreclosures and bankruptcy filings?  One way is to merely not impose interest penalties and late fees associated with these accounts.  The other would be to discharge any late assessments on a regular basis.  Thus, the HOA's are caught in a catch 22 scenario.  If they don't impose the interest penalties and late fees, they are in violation of the Declarations and Covenants.  If they assess these fees, they will most likely not see the funds at the end of the day anyway.

In addition, the rising Accounts Receivables on the Association Balance Sheet will be problematic as these associations will find it difficult to market vacant properties within the Association.  As units sit idle, the ability to find qualified buyers will decrease as a result.  What then is the answer?  The FHA must put in place specific exceptions relating to vacant properties already in foreclosure or bankrupcty proceedings.  Associations should not be penalized by having units excluded from the program for merely following Association guidelines.  Already, homeowner associations faced with declining monthly assessment revenues  are finding it difficult to provide even the most routine maintenance services.  Currently, homeowner associations in several states may only collect those legal fees, late fees, and interest penalties enforced within the six-month period prior to the foreclosure.  With individuals seeking bankruptcy protection for any reamining assessments, late fees, legal fees, and interest penalties in record numbers - the implementation of this requirement by the FHA become quite problematic.