New FHA Certification Rules Make Compliance Difficult

By David C. Swedelson, Senior Partner SwedelsonGottlieb, California Condo Lawyer and HOA attorney

Interesting article in the October 23, 2011 edition of the Los Angeles Times regarding recent rule revisions by the Federal Housing Administration (FHA). Follow this link to read the article. We have been reporting on this issue, follow this link to read our blog post from August 21, 2011, “CAI Slams latest FHA Guidance”. As pointed out by the article, a little-publicized switch in federal mortgage policy is causing problems for condominium sellers, buyers and homeowner association boards across the country.

The recent series of rule revisions by the Federal Housing Administration has apparently caused thousands of common-interest developments to become ineligible for FHA mortgages. The article suggests that this has abruptly shut off loan money for would-be buyers and refinancers, forcing them to pursue conventional bank loans requiring much higher down payments – sometimes 20% or higher versus the FHA’s 3.5% minimum – that they often cannot afford.

The FHA defends the rule changes it has adopted, which focus on community association budgets, insurance and financial reserves, as having been prudent and designed to avert losses from delinquencies and foreclosures. The FHA nonetheless acknowledges that thousands of community associations have failed to obtain or apply for required recertifications under the new rules. “Out of approximately 25,000 common-interest developments nationwide with expiration dates for FHA eligibility between last December and Sept. 30 of this year, only 2,100 – just 8.4% – have been approved or recertified by the agency, according to Lemar Wooley, an agency spokesman.”

The article points out that there are many people that suggest that FHA did not consult adequately nor think through some of its policies with the community association industry before changing its rules. “Andrew Fortin, government affairs director of the Community Associations Institute (CAI), said the rule that is hampering . . . refinancing – that no more than 15% of the units in a development be 30 days or more delinquent on their association dues – is often impossible for volunteer boards of directors in large projects to keep track of, much less to certify to FHA.”

As the article also points out, “the new rules put board members into legal jeopardy by requiring them to sign certifications attesting that the governing documents comply with all local statutes and that they have no knowledge of situations that could cause any owner to become delinquent at some later date. The mandatory certification carries a maximum penalty of $1 million in fines and 30 years’ imprisonment if found to be incorrect. Large numbers of association boards have balked at this requirement, critics say, leading to the drastic drop in certification requests and eligibility.”

The fact is that the FHA rules are difficult to comply with and ask too much of community associations and their boards. And as FHA compliance is not a requirement of California community associations, boards cannot and should not be compelled to try obtain FHA compliance, and most likely won’t so long as the current rules remain in place.

Questions or comments? David Swedelson can be contacted at

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