Perhaps one of the most difficult aspects of the recent recession was the sudden evaporation of credit from major banks and lending institutions. The logic behind it was understandable: too much easy credit had led, in part, to the collapse that stunned the nation and then the world in 2008. Although some housing markets were less affected than others (Florida and Nevada have been especially hard-hit) everyone still felt the shifts. Among the repercussions was a new set of regulations issued by the Federal Housing Administration (FHA) in February 2010 which created a number of requirements for any building that wished to accept FHA-backed mortgage loans.
“The FHA eliminated spot loans by mortgage letter 2009-46B on February 1, 2009,” states attorney Jennifer A. Loheac, Esq., a partner and a member of the Co-op and Condominium Practice Group at the Morristown law firm of Becker & Poliakoff. “What this meant is that homeowners seeking to purchase in condominium communities were no longer eligible for financing backed by FHA unless the entire condominium project was approved,” she said. “This has tremendous consequences for most purchasers because most lenders only make loans that are attractive to a secondary market to spread the risk. Also, conventional mortgages typically require 20 percent down and solid credit history. Where a prospective buyer is a first-time homeowner, a young person with school loans or a senior without a cash flow, this is a challenging threshold to meet. With FHA, there's only usually a 3 percent down payment required.”
These new requirements can be quite problematic, echoes Lauren Peddinghaus, CMCA of Haus Financial Services LLC in Chicago. Associations must keep 10 percent of their annual budgets earmarked for reserves, she said. “Some associations, particularly the smaller ones, do not produce an annual budget, let alone allocate funds for reserves. These associations have to implement a budget that meets the requirements before they can become FHA certified.”
A Bit of Banking Background
The Federal Housing Administration was born during the Great Depression, created by Congress in 1934 and absorbed by the Department of Housing and Urban Development’s Office of Housing in 1965. The main purpose of the FHA is to provide mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. The FHA insures mortgages on single family and multifamily homes, including condominium communities. According to the FHA website, it is the largest insurer of mortgages in the world, insuring more than 34 million properties since its inception. That number currently includes 4.8 million insured single family mortgages and 13,000 insured multifamily projects.
As the FHA website explains, “FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.”