Financial Articles
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Three key "percent" indicators that help understand what is going on at the association are:

% of Owner Occupants
% of 90 Day Delinquencies
% of Reserves Funded

% of Owner Occupants   Lenders require 50% to 67% owner occupants to consider making a loan to a prospective purchaser. This requirement comes from proven experience that homeowners take better care of their homes than investors. Since a lender has a share of the common area liability, they want to be sure a majority of residents have a high motivation in caring for the property and are willing to ante up the money to do it. Homeowners have a higher likelihood of doing that than investors. Therefore, if the percent of owner occupants drops below 67%, financing options disappear. Real estate market value is directly related to the availability of financing. No financing will mean declining property values.

% of 90 Day Delinquencies   This is an indicator of how the association is handling its business. If a high percentage of owners are being allowed to be delinquent without aggressive collection, it appears that the board is not doing its job. Further, if people aren’t paying, there is inadequate money to get reasonable maintenance done and the property will show it. If maintenance is not getting done, property values will fall.

% of Reserves Funded   Reserve planning represents the association’s attitude about long range preparedness. Reserves include all is the common area components for which the association has maintenance responsibility having a useful life of three and thirty years. For each of these components, a remaining useful life and cost of repair or replacement is established. From all this information, a reserve funding plan (usually monthly) is formulated to pay for all those items without the need for special assessments. Components that can be excluded are those that can be reasonably paid for from the regular operating budget. Reserve planning is fair to all owners because all pay a proportional share of the costs based on the time they own the property. Special assessments penalize those owners who happen to be there when those predictable expenses come due.

So, the percentage of reserves that are funded indicate the association’s willingness to perform long range planning. Ideally, it should be around 100% but will vary somewhat due to income and expenditures. For many associations, unfortunately, the percentage is much less and for way too many, O%. The poor maintenance condition of these associations is painfully obvious. Due to lack of adequate reserve funding and the unpopularity of special assessments, maintenance is usually deferred and the assets deteriorate along with the property values. The Percent Funded indicator is a strong and reliable one.

These three % indicators tell who is living there, how well they are doing managing their money, and how well they are planning for the future. It is like knowing the mileage, model year, and "brand reputation" of a used car.

Thanks to Robert M. Nordlund of Association Reserves, Inc.   BACK

Tightening the Budget Belt
Money, as they say, doesn’t grow on trees. Even if it did, every Fall, the money trees would lose their bills and the Board would still be scratching its head on where to find more to make it through the year. And then there’s that darned inflation eating away at the roots.

Since money is so hard to grow, let’s take a look at ways to tighten the belt by finding large recurring costs and finding ways to trim them.

Utilities. Compare water and sewer usage for the same periods over the last two years. Are there any substantial unexplained variances that could be attributable to undetected leaks? Leaks of this kind can go undetected for years and rack up thousands of dollars in extra bills. Another way to reduce water consumption is to convert turf areas to drought resistant ground cover.

Insurance. Consider raising your deductible. Increasing to $1000 or $2500 will mean a substantial premium savings.

Pools. Consider adjusting temperature down several degrees to decrease the heating bill. Solar water heating alternatives are now available that can substantially reduce heating costs and pay for itself within a few years. Replace your cartridge type pool filter with a low maintenance sand filter which usually pays for itself within 1-2 years.

Lighting. Convert from incandescent to high-efficiency exterior lighting like mercury vapor and compact fluorescent. Besides brighter light and increased security, the cost of conversion will often pay for itself within a year and then you’ll enjoy up to a 70% energy savings.

Preventive Maintenance. A huge money saver. Annual inspections of the buildings and systems will identify small repairs before they get out of hand. Also consider:

• Carpet Cleaning: Professionally clean clubhouse and common corridor carpet at least once per year or more to prolong life.
• Elevators: Do an annual inspection of the shaft, pit and equipment room with the elevator maintenance contractor to ensure that contracted maintenance is being performed.
• Fences - Cedar & Redwood: Leave wood unpainted to age naturally and eliminate repaint cost.
• Paint: Make sure to specify the highest quality paint since the increased cost over "painter grade" is small compared to its performance and durability.
• Roofs: Hire a roofing contractor annually to inspect for and repair missing shingles, breaks in the membrane and inadequate flashing before the rainy season.
• Sidewalks: Grind down tripping hazards where possible instead of replacing concrete.
• Corrective Tree Pruning: Perform corrective pruning every 3-5 years to eliminate deadwood, enhance look, treat for diseases/pests and to extend the lives of these valuable assets. Install a "no turf circle" around each tree to protect against mower and weed wacker damage that will kill the tree.

Siding Replacement Consider a cement based siding like Hardiplank which is fireproof, dryrot resistant and has twice the useful life as plywood and hardboard sidings. Vinyl siding has improved dramatically in quality, color, selection and durability in recent years. Vinyl can often be overlaid on existing siding and eliminates the need for cyclical painting. Keep the color neutral as it lasts a long time.

Postage & Mailing Meeting notices and information can often be distributed to residents by way of flyer boxes like the ones used by real estate agents. Save stamps, envelopes and time.

Don’t overlook the obvious. Phone your landscape contractor, pool maintenance, roofing contractor etc and inquire about ways to trim costs. There are new technologies coming out all the time.

In the final analysis, belt tightening and putting your association on a fiscal diet is really a matter of keeping an eye out for opportunities. Don’t be a afraid to question how things have been done in the past. They may be right, but then again, they may be wrong. Make sure you understand the difference. BACK

Reversing The Death Spiral
There is a term for homeowner associations that don’t plan. It’s called: "The Death Spiral". This applies to associations that have neither a plan nor money to properly maintain the property. These folks have a kind of myopia...an inability to see their assets deteriorate right before their eyes complicated further by the belief that someone else will pay for the problem in the future.

In recent years, a tool has been developed that reverses the Death Spiral, or better yet, prevents it to begin with called the "Reserve Study". The reserve study identifies major repair and replacements like painting, roofing and fencing that happen between 3 and 30 year intervals. For example, paint lasts about 6 years on average, while asphalt shingles last 25 years or more. The study provides a fair funding plan to make sure enough money is there when these components come due.

Reserve planning gets to the essence of the shared destiny of homeowner association living. Homeowners that choose common wall living assign exterior maintenance responsibilities of their home and other commonly held assets to the association. Since owners buy and sell, come and go at different intervals, a special system is required to address maintenance of major expenses and to balance out the costs fairly. A long range reserve plan projects maintenance requirements and costs over a thirty year period and divides the costs up monthly so that each owner pays a fair share of the expenses. Moreover, the plan provides present and future Boards with a sensible roadmap to handle major maintenance.

If your community is in a Death Spiral...reverse the avoidable with a reserve plan today.  Don’t die a slow death...reserve and keep your assets alive! BACK

The Money Tree
When I was a young, my brothers and I would refer to our dad as "The Money Tree". When we needed some, all we had to do is pluck some bills. Sadly, some community associations handle their reserve planning as if they owned a Money Tree.

Let’s do the numbers:
Option #1 - If a new association initiates a reserve plan to pay for future roofing, painting, paving and other cyclical repairs, the portion of the monthly assessment dedicated to those costs amounts to only 5-15% of the total.

Option #2 - The association that waits for five or more years will commonly need to allocate 30-50% of its monthly assessment for reserve expenses to catch up. And there is a strong likelihood that periodic special assessments will be needed for urgent repairs.

With Option #1, reserve funding hardly impacts the monthly assessment; With Option #2, the increased assessments become a real burden on owners that are paying the price of their predecessors’ poor planning.

Reserve expenses are predictable so there is no excuse for not developing a plan to both fund and schedule the work. In a growing number of states, it’s the law but it just makes good sense since aging assets will only require bigger and more frequent repairs and replacement.

One of the key indicators of a reserve plan is the Percent Funded. All associations should be 100% Funded (have the indicated amount of money side aside according to the current time line of a 30 year reserve study). Some argue that if there is enough cash to pay for current reserve expenses, what does it matter if you have 100% or not? If all owners are not paying their fair share of reserve costs today, someone else will have to pay in the future. To accept anything less than 100% funding is a slippery slope. Boards that do are soon performing all kinds of budget gyrations to make it work.

Failing to fund reserves is the same thing that happens with the infamous chain letter: Pay-off is based on a never ending number of future suckers who will ante up money for those that came before. The Money Tree is a myth. The responsible way to pay for reserve expenses is a plan where every owner pays a fair share for the time they are living there. BACK

Home Equity Loan Bite
There is a "vicious dog" that threatens unwary homeowner associations. It’s called the "Home Equity Loan". This "dog" doesn’t even belong to the association. It belongs to the community homeowners. It’s attractive, looks pleasant enough and promises never to bite. Some of your neighbors have acquired it hoping to make their lives better. Some come to find they’ve exchanged their hard earned long term home equity to pay off short term debt.

Home Equity Loans are being advertised that offer 100% to 125% of the appraised value of the home (more than the house will sell for). The lenders only extend such an offer because they are betting that real estate prices will continue to rise, eventually making a bad loan good. They are also betting that most folks will not want to lose their home. Both are bad bets as evidenced by the massive S&L failures of the 1980's. Those failures were based largely on bad home loans.

So what does all this mean to a homeowner association? When the real estate market turns down (and it will) and prices drop (and they will) some homeowners may not be willing or able to continue paying either their home loans or their monthly assessments. If this happens, the association will have no home equity from which to recover the delinquent assessments. While the association technically has the right to collect money by other methods, if the debtor is unemployed, self-employed, abandons the home or leaves the area, those methods may be moot. If the delinquency is uncollectible, the other owners will have to ante up the money themselves. Ouch!

Moral of the Story: The association has no control over real estate prices and loose credit practices. But it can and should protect itself by enforcing a timely assessment collection policy so that delinquencies are stemmed quickly. Plan well and prosper. Fail and this dog will bite.   BACK

Fraud Squad
Fraud can devastate the finances of a homeowners association. The association treasurer or property manager can often have access to 10s or 100s of thousands of dollars with little oversight. Embezzlement can be both planned or spontaneous and the perpetrator young or old.

Associations are at risk because they are vulnerable. Board members may not be financial gurus who know what to look out for. Property managers do not require any kind of special licensing or education. Many boards simply don't want to be bothered and delegate too much responsibility to one individual.

In accounting terms, fraud is the misappropriation (theft) of assets. "Assets" often means cash, but can include other assets such as furniture, equipment and supplies. Misappropriation of assets can be accomplished in several ways. Examples include:

1. Theft of cash receipts. Associations should insist that all payments be by check made payable to the association, not the management company or the Treasurer.

2. Stealing assets. If someone walks off with your expensive pool furniture, you have been defrauded. That's why pool keys are controlled and locks are changed from time to time.

3. Paying for goods and services not received. This is probably the hardest fraud to detect. Examples include:

~ The President has his home remodeled and charges it to repair and maintenance.
~ The resident manager adds a brother to the payroll even though he does no work for the association.
~ The manager has bogus companies bill the association for nonexistent repairs and maintenance. The auditors don't detect the fraud because the billings are supported by official looking invoices and the canceled checks have been endorsed in the names of the phony companies, giving the appearance of valid transactions.

Fraud may be concealed through:
1. Falsified documents. Fictitious invoices, forged check requests or purchase orders, and forged signatures on checks. Altered checks are those where either the payee was changed, the amount altered or the endorsement forged. A cash shortage can be concealed in a bank reconciliation by using a false total for the outstanding checks. For example, the outstanding checks may add up to $5,252.11, but the bookkeeper shows the total as $5,752.11 to hide a $500 theft.

2. Collusion. Collusion means two or more people working together to perpetrate the fraud, making detection more difficult: A crooked board member who authorizes a bogus payment to a crooked manager who shares the booty. An auditor sees that the transaction was approved and believes it to be valid.

Fraud can often be detected by merely paying attention to your financial statements, bank statements and budget variances. Missing documents, a general ledger that is out of balance, strange budget variances should alert the Board that something may be wrong. These signs should cause the board to ask questions. If evidence of fraud is compelling, never accuse anyone directly. Let your attorney do the talking.

Fraud occurs when too much authority rests in a single individual. Whenever one person has all three of these powers, fraud is possible:

1. Initiates transactions: Can have checks prepared, people added to the payroll, money transferred, bank accounts opened, accounts receivable written off.

2. Approves transactions: Can approve own requests: a treasurer or manager who not only prepares the checks, but signs and mails them too.

3. Records transactions: Allows bogus transactions with phony accounting entries. Examples: Receives cash from a delinquent owner, then writes it off as a bad debt; Records an alimony check as "Repairs-General"; Makes a cash withdrawal and posts it as "Administrative Expense." All thefts, of course, are charged to expense categories that are under budget so there won't be any unusual variances.

An effective system of internal financial control requires "division of duties". First, do not allow any one individual to complete a transaction from beginning to end.

1. Checks should have two signatures.
2. Have supporting invoices, contracts, time cards, etc. when signing checks.
3. Do not allow the manager to keep association money in a company "trust" account. The association’s money should be kept in an association bank account.
4. When using an outside payroll service, monitor the payroll each period.
5. Don't pay any large expense that wasn't preauthorized.
6. Be alert to a deteriorating accounting system. Financial statements, records and files should be up to date and furnished to the Board on a timely basis. Beware of financial reports that are consistently 2 or 3 months late, bank reconciliations that don't agree with the books, accounting entries that are unexplained or don't make sense -- all of these things are cause for alarm.
7. Check manager references before you hire or contract. Do not rely on professional affiliations. These organizations cannot assure the competence or honesty of their members.

In the final analysis, you can’t prevent a determined crook, but you can increase the odds in your favor. Be alert, but don't be paranoid. Put Fraud Squad precautions into place, chances are the issue will never surface. By Gary Waltrip, CPA   BACK

Collection Corrections
Why is it taking so long to collect delinquencies? Can we close the pool to the deadbeat? Why can’t we collect on that judgment? These are questions that too many board members and managers ask...mainly because there is no collection policy. A clearly worded, communicated and enforced collection policy is the solution to collections. A collection policy simplifies one of the Board’s most disagreeable tasks: collecting money from neighbors. Since the course of action is predetermined, the Board doesn’t need to wring their hands over each case. Here are some of the essential components:

Payment Date: ___ of the month
Payment Late: ___ of the month
Late Fee: $___
Finance Charge: ___% per month
Payments applied to oldest balance first
Type of notices (10 Day Notice to Pay, Notice of Intent to Lien, etc.)
Who provides the notice (association, attorney)
When account is referred to an attorney
All collection costs charged to the debtor
Association has right to obtain and execute on a personal judgment (garnish wages, attach personal property, etc.)
Amenities (pool, tennis court, clubhouse) are suspended for delinquencies of a certain dollar amount

Copy Assessment Payment Checks For the record, photocopy a check from each owner when received, whether delinquent or not. The information will be valuable if collection is necessary and may save a $100 - $200 "skip trace" cost later.

Get Work Phone Numbers. Getting a judgment or lien doesn’t guarantee payment. In most jurisdictions, a collection can receive up to 25 percent of a debtor’s "disposable" wages (after withholding). Ask all owners for work phone numbers for "emergencies" with a pool or car registration form.

Notice All Legal Owners. There may be more than one owner on each unit title. Make sure all applicable names are on the notices. A title company can assist with this information. All owners are equally responsible for the entire debt.

Checks Marked "Paid in Full". Cashing checks so marked could be considered binding. Make sure the amount truly is "paid in full" before depositing.

Record Liens. Liens alert lenders, purchasers and title companies of a "cloud on title" that needs to be cleared up. For this reason, long standing delinquencies often get cleared up at refinancing or sale closing. A recorded lien improves the odds of collecting even if an owner files bankruptcy or a lender forecloses. If the lender forecloses, the association can collect if there are surplus proceeds. If there is no lien and the property is sold, the association has no claim.

Let the Attorney Handle It. After several rounds of written notices and 60 days have passed, turn the matter over to the association attorney. Cease communications with the debtor. Don’t discuss repayment agreements, collection costs or payoff information. Referring all calls to the attorney will expedite the process. One attorney letter often does the trick.

Take Away Privileges. Many association governing documents allow the association to withhold access to amenities like pool and parking. If allowable, do it.

Shut Off Association Utilities In some cases, drastic action is called for. Your collection policy can call for shutting off association paid utilities like water, if all other measures to collect have been tried and failed. This may require a plumber.

Money is the life blood of every homeowner association. Since most operate on a tight budget, if one owner defaults, the effect is soon felt by all. There’s no magic money or lines of credit. If one doesn’t pay, the rest have to. If your collections need corrections, get after it! BACK

Reserves: Law or Logic?
In October 1999 Oregon amended the Condominium and Planned Community statutes. One significant improvement involved reserve planning and funding for future repairs and replacements. For associations that came into existence after October 23, 1999, reserve planning is now mandatory. For the others, if reserve language is in the governing documents and a written request is received from one homeowner to have a reserve study done, the Board is required to move forward with the process.

But there’s more to it than that: Where state statute stops, "fiduciary" duty kicks in. A "fiduciary" is one who is given the trust or confidence of another. The Board is entrusted with care of the biggest single asset that most people own. These people pay money into a common fund and have the right to expect the association to be run like the business that it is, a corporation often responsible for millions of dollars in assets.

Reserve studies analyze and predict the cost and timing of future repairs of association maintained components like roofing, pools, paving, landscaping, painting, fences, decks and other items that have a useful life of between 3 and 30 years. The typical condominium association has between 15 and 30 items that fall under the "reserve" definition. When the repair costs of these 15-30 items are added up, it usually amounts to hundreds of thousands, even millions of dollars. This is not chump change. It takes careful planning to accumulate the funds plus know how and when to spend it. That’s what reserve planning is all about.

The reserve study concept was developed during the 1980s as a result of the many aging homeowner associations that found themselves in dire straits due to failure to plan for reserve expenses. The homeowners expected the Board to plan for such events and all too many had no plan other than "dealing with it" when the time came. Well, those "times" came all too soon and inevitability lived up to its reputation. Thus, the obvious need for long range planning came about.

Reserve plans require all owners to share in paying for future repairs. This is as it should be. Each owner pays a monthly share for the assets being used up. If an owner sells, the next owner picks up the monthly share. All owners pay a fair share and no more special assessments!

If you’ve been thinking there’s a better way to manage association assets, there is: It’s called a Reserve Study. Whether by law or logic, it’s time your association started doing business like a business.  BACK

Reserve Conundrum
Most homeowner associations established over 30 years ago now face the cost of replacing common elements they were not planning for. While HOAs commonly have responsibility for the replacement of roofing, things like plumbing, wiring, siding, concrete and streets are often not included in reserve planning since they were considered to have a much longer lives than 30 years. But after 20-30 years pass, suddenly that window is not only cracked, it’s wide open. On buildings older than 50 years, replacement of, elevators, wiring and plumbing is more likely and a hugely expensive repair.

The idea behind updating a reserve study each and every year is that components like these that were not included in the original list a some point in time become eligible to be included in the plan. And these particular components carry larger than average price tags so when they qualify for a 30 year remaining life, they need to be added to the reserve plan so that funds can be properly reserved. If this is not done, you’ll experience the Year of the Killer Special Assessment.

Another reserve plan phenomena has to do with changes in materials and designs. Some of these things are mandated by code like elevator safety or thicker walls for more insulation for improved energy efficiency. Some are triggered by current taste and technology. And now, green and sustainable building techniques add yet another layer of complexity on reserve planning.

The beauty of reserve planning is that it can grow and change as conditions do...as long as the board is doing the required annual revisions and updates. Keeping up with a changing world is essential in the world of reserves. Last year’s reserve study is old news.

A conundrum is a riddle or puzzle. But in this particular case, the solution is within reach by using a qualified reserve study professional like a Professional Reserve Analyst (PRA). PRAs are members of the Association of Professional Reserve Analysts www.apra-usa.com and have years of experience in this craft. If your HOA is getting up in years or planning a facelift, make sure your reserve plan keeps step with the changes.  BACK

2009 FHA Loan Rules - Part One
Federal Housing Administration (FHA) has come out with rules on condominium loans, and they're a mixed bag for investors, second home and other buyers and sellers.

On the one hand, the rules allow lenders a lot of more flexibility in reviewing condo project eligibility and documentation. That's good -- it should allow more lenders to increase their condo activity in the red-hot FHA segment of the market.

On the other hand, the agency is imposing a number of important restrictions. Here's a quick overview of the rules:

Units in condo hotels are prohibited. Ditto for units in time share or "segmented ownership" (aka fractional share) projects, houseboat condominiums and projects where there are multiple dwellings inside single condominium units (aka shoebox condominium).

FHA said it won't insure units in condominiums where more than 25 percent of the total space is allotted to commercial uses, such as retail stores or offices. In fact, the agency made a point of emphasizing that it will reject loan applications from any property that it deems not "to be primarily residential" in character.

FHA also won't insure condo loans if more than 10 percent of the units are owned by investors. That's a much stricter standard than Fannie Mae's, which permits up to 49 percent of units to be investor owned. The 10 percent rule applies as well to situations where a builder or developer is left with unsold units and rents them out.

The agency won't endorse loans from projects where less than 50 percent of the total units already have been sold, or where less than 50 percent of the units are owner-occupied or sold to buyers "who intend to occupy them."

FHA doesn't even want to insure loans on units located in buildings with heavy concentrations of units that are FHA-financed. If more than 30 percent of the unit owners in a project took out FHA-backed loans, the agency doesn't want to do any more business in that condominium.

In a concession to rental apartment project investors who convert their buildings to condo, FHA is abandoning its current one-year mandatory waiting period before considering loan applications on condo units.

Finally, FHA said it doesn't want to have anything to do with condo projects that might be affected by negative environmental factors. For example, it won't insure units in buildings located within a thousand feet of a major highway - it wants to avoid adverse noise pollution impacts on property values - or within three thousand feet of a dump, landfill or EPA Superfund site.

by Kenneth R. Harney   BACK

2009 FHA Loan Rules - Part Two
Under revised guidelines effective October 1, 2009, the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD) is implementing a new approval process for condominiums to be eligible for FHA/HUD financing.

With the recent demise of so many non-conforming and sub-prime mortgage programs, FHA insured loans with their low down payment requirements may be some buyers’ only feasible lending source. Thus, FHA/HUD certification is taking on a new importance for condominium projects because it potentially increases the pool of available buyers.

In the past, a condominium project that had never been certified by FHA/HUD could receive “spot approvals” for FHA loans on single units. Ordinarily, a lender would do the necessary work to get the spot approval. Condominiums that were on the FHA/HUD approved project list but lost certification due to construction defect issues were not eligible for spot approvals. Either the homeowner association or a lender could submit a recertification package to FHA/HUD. Under the new guidelines, the spot approval process will no longer be available.

Under new guidelines, FHA/HUD will allow lenders to determine project eligibility, review project documentation and certify compliance with the National Housing Act requirements through two different processes: the HUD Review and Approval Process (HRAP) and the Direct Endorsement Lender Review and Approval Process (DELRAP). In cases where the project has been listed as rejected or withdrawn from the approved FHA/HUD project list, the only process available for recertification is the HRAP process.

Both the HRAP and DELRAP require lenders to make the required certifications of project acceptability. In some cases, we anticipate lenders may seek the opinion of the homeowner association’s attorney regarding compliance with specified legal requirements. In other instances, primarily with large institutional lenders, the certification process may be conducted internally.

Because of the new guidelines, homeowner associations that receive requests from lenders to provide attorney opinions regarding HUD/FHA certification or recertification should contact their attorney to discuss the implications of giving such letters and the cost to prepare them. A lender may also request owner-occupancy ratios, status of reserve funding and other data associated with underwriting the project.

Project approvals, which used to remain in place until something gave FHA a reason to withdraw approval, will now expire every two years and require a recertification that the HUD owner-occupancy requirements continue to be met and that no conditions currently exist that would present unacceptable risk to the FHA, such as pending HOA related litigation, pending special assessments or problems with insurance.

By Eric TenBrook and David Silver, Attorneys at Barker Martin, P.S.   BACK

FHA Condominium Loan Guidelines
On Friday, November 6, 2009, the Federal Housing Administration (FHA) issued two documents related to FHA mortgage insurance requirements for condominium associations: HUD Mortgagee Letter 2009-46A and Mortgagee Letter 2009-46B. These requirements have substantial impact on FHA loans made for condominium units.

What is FHA Mortgage Insurance? FHA mortgage insurance is a policy that protects lenders against some or most of the losses on a mortgage if the borrower defaults on the mortgage. FHA insurance is typically required on mortgages where there is less than a 20% down payment. The insurance is funded by a fee on the overall mortgage amount and a small annual levy on the loan amount. FHA insurance is important, as it provides a mechanism to recover losses associated with default and ensures a continuing flow of money into the mortgage markets.

Why should my condominium association care about the FHA requirements? This is an issue of interest for condominium associations as FHA insured mortgages are growing as a financing option for those seeking to purchase condominium units. While FHA-insured mortgages amounted to only 5% in 2007, that number has increased to 20% in 2008. As lenders continue to tighten lending criteria, qualifying for FHA mortgage insurance provides potential buyers with an additional financing option and, thus, makes units in your condominium association marketable to a larger pool of potential buyers.

How does the FHA approval process work? Typically a lender processes the paperwork associated with meeting FHA requirements. For new developments, developers may also work with FHA to have their project pre-qualified for FHA financing. In processing the paperwork to qualify for FHA approval, lenders will seek information required by the FHA from a condominium association. Condominium associations may also be able to work directly with the FHA to qualify for financing. Once a project qualifies for FHA mortgage insurance, FHA may insure mortgages for buyers in a condominium up to a certain percentage of units.

What FHA criteria apply to condominium associations? The FHA mortgagee letters outline criteria that lenders or FHA will examine to determine whether a condominium association qualifies for mortgages insured by FHA. For existing condominium associations, these criteria include:

Eligible Projects. Eligible projects are declared condominium projects that exist in full compliance with appropriate state law. Condominium hotels, timeshares, houseboat projects, multi-dwelling unit condominiums and projects not deemed to be residential are not eligible for FHA insurance under the regulations.

Eligibility Requirements. All condominium project approvals must meet the following requirements:

• Projects must consist of two or more units.

• Projects must be covered by hazard and liability insurance and flood and fidelity insurance where applicable.

• Right of first refusal is permitted, provided it does not violate the Fair Housing Act regulations found in 24 CFR Part 100.

• No more than 25% of the total floor area can be used for commercial purposes. The commercial portion must also be of a "nature that is homogenous with residential use."

• No more than 10% of the units may be owned by one investor. This limitation also applies to developers/builders that subsequently rent out vacant and unsold units. For projects with 10 or fewer units, no single entity can own more than one unit.

• Delinquent Homeowners Association Dues/Assessments: No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payments.

• At least 30% of the total units must be sold prior to endorsement of a mortgage in on any unit. After December 31, 2010, the pre-sale requirement will increase to 50%.

• At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50% of the number of pre-sold units. (Through December 31, 2010, or otherwise provided by FHA, bank-owned properties, vacant, or tenant-occupied real estate-owned properties are excluded from this calculation.)

Budget Review. Mortgagees must review all HOA budgets (actual budgets for existing projects and projected budgets for new projects) for all project approvals. The review must determine that the budget is adequate and:

• Include allocations to ensure sufficient funding for upkeep of amenities and features unique to the project.

• Provides for the funding of replacement reserves for capital expenditures and deferred maintenance amounting to at least 10% of the budget.

• Provides adequate funding for insurance coverage and deductibles (as required under the insurance requirements section).

If the documents do not meet these standards, the mortgagee may request a reserve study to assess the stability of the project. The reserve study cannot be more than 12 months old. In reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed.

Insurance Requirements. Condominium projects must be covered by hazard, flood, liability, and other insurance as required by state or local laws, or acceptable to FHA under the following criteria:

• Hazard Insurance: The Condo Association is required to maintain a master or blanket property insurance equal to 100% of current replacement costs exclusive of land, foundation, excavation, or other normal exclusions. If the association does not maintain 100% coverage, unit owner gap coverage does not satisfy meeting this requirement. HO-6 Coverage: In cases in which the master policy does not include interior unit coverage, the borrower must obtain a "walls in" coverage policy (H0-6).

• Liability Insurance: The HOA is required to maintain comprehensive general liability insurance covering all common elements, commercial space owned and leased by the owner’s association, and public ways of the condominium project.

• Fidelity Bond/Fidelity Insurance: New or established projects with more than 20 units are required to carry fidelity bonds/insurance for all officers, directors, and employees of the HOA and all other persons handling or responsible for funds administered by the HOA in an amount equal to three months aggregate assessments on all units plus reserve funds.

• Flood Insurance: Insurance coverage equal to the replacement cost of the project less land costs or up to the National Flood Insurance Program (NFIP) standard of $250,000 per unit, whichever is less. If insuring a residential building, the maximum building coverage is $250,000 times the number of units in the building. The association, not the borrower, is responsible for maintaining adequate flood insurance under the NFIP when the building is located in a Special Flood Hazard Area.

• Determining Need for Flood Insurance: If the property is located in a 100-year flood plain, flood insurance is required. If the project is not located in a 100-year flood plain, it is not subject to the flood insurance requirement if documentation is provided (documentation that includes either a final Letter of Map Amendment or a final Letter of Map Revision).

If my condominium association is already FHA approved, do we need to take additional action?   Projects that received FHA approval prior to October 1, 2008 will be required to recertify on or before December 7, 2009. Projects approved between October 1, 2008 and December 7, 2009 will follow the recertification requirements defined below:

Recertification: Condominium projects will expire within two years from the date of placement on the list of approved condominiums. Further participation in the program after this two-year period has expired will require recertification to determine that the project is still in compliance with the HUD’s Owner-Occupancy requirement and that no conditions currently exist which would present an unacceptable risk to FHA. Items that must be given consideration are:

• Pending special assessments

• Pending legal action against the condominium association or its officers or directors

• Adequate hazard, liability insurance, and when applicable, flood insurance coverage

Concentration Limits (Temporary) During the transition period of December 7, 2009 to December 31, 2010, FHA will increase its temporary concentration limits (the percentage of units that it will insure in a project) to 50%. FHA will also consider increasing concentrations up to 100% if a condominium project meets additional criteria that include:

• The project is 100% complete and construction has been completed for at least one year.

• 100% of the units have been sold and no entity owns more than 10% of the units in the project.

• The projects budget provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% for the budget.

• Control of the HOA has been transferred to the owners.

• The owner-occupancy ratio is at least 50%. (Bank-owned properties, vacant, or tenant-occupied real estate-owned properties are excluded from this calculation.)

Concentration Limits (Successor) Beginning on January 1, 2011, or earlier by FHA action, FHA concentrations will revert to the following:

• In projects of 3 or fewer units, FHA will insure no more than 1 unit.

• In projects consisting of 4 or more units, FHA will have no more than 30% of the total units encumbered with FHA insurance.

• Calculating the level of FHA concentration in a project declared with legal phases will follow the same methodology as the owner-occupancy requirements.

From Community Associations Institute (CAI). CAI will provide additional information as it becomes available on the "Heads-Up" page on www.caionline.org.   BACK