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FHA condo lending rules threatening stalled market
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LAS VEGAS REVIEW-JOURNAL
Updated: Aug. 25, 2011 | 7:34 a.m.
Las Vegas condominium owners already reeling from huge drops in property value face a new financial threat from federal rules that drastically limit who can buy them out.
Thanks to high numbers of investors and association dues deadbeats, the majority of Clark County's 90,000 condos are now or could soon be off-limits to most buyers, setting up a vicious cycle that could depress prices even more. Adding insult to injury, condo owners with some federally backed loans are no longer eligible for refinancing.
Behind the latest condo-market woes are regulations from the Federal Housing Administration, which guarantees mortgages that banks wouldn't otherwise write. The FHA denies loan guarantees on entire condo communities if more than half the units are owned by investors, or if more than 15 percent of owners are behind on association dues.
Exact figures are unavailable, but that means a growing number of condo sellers are cut off from most buyers.
Jon Eberhardt, president of FHA certification company Condo Approvals, says 80 percent of today's first-time home buyers purchase with FHA guarantees.
Paula Burlison, of Coldwell Banker Premier Realty in Las Vegas, adds that FHA borrowers comprise 70 percent of all buyers purchasing with mortgages.
The policies haven't helped an already battered condo market. The median local condo sales price was $59,000 in July, according to the Greater Las Vegas Association of Realtors. That's down 13.2 percent from $68,000 in July 2010, and 71 percent from $205,000 at the market's mid-2006 peak. Market values overall have fallen 9.6 percent in the past year, and 61.3 percent since mid-2006.
Burlison said she sees condos selling today for as little as $25,000, and Clark County reported in 2010 that more than 10,000 condos were standing vacant.
"It's the law of supply and demand. Because we cannot finance these properties, the number of people who can buy them is much lower, and supply has gone up," Burlison said.
The problem is even bigger in condo communities that restrict rentals, where owners can't sell to FHA borrowers or even to investors who would rent units out. They have more vacancies than their unrestricted counterparts so prices have dropped more, Burlison said.
The trouble started in 2008, when the federal Housing and Economic Recovery Act required regular reviews of condo communities to help protect taxpayers by evaluating whether units are safe prospects for federal backing. The prior policy called for only periodic recertification that "no conditions exist which would present an unacceptable risk to the insurance fund," said Lemar Wooley, a spokesman for the U.S. Department of Housing and Urban Development.
Checkups based on late dues and investor numbers especially hurt Las Vegas. Local unemployment was 13.8 percent in July; throw in discouraged and underemployed workers, and joblessness jumps to nearly 25 percent. So dues delinquencies are high.
What's more, up to 60 percent of local condo buyers are cash investors, said Leslie Sherman, director of education for Realty Executives of Nevada. That means many condo communities run afoul of the FHA rule barring investor ownership of more than 50 percent.
It's a self-perpetuating problem, Burlison said: Close off a community to owner-occupiers with too many investors and it'll get more investors -- placing recertification farther from reach.
"Until the guidelines change, or until something changes in the marketplace, it's absolutely going to get worse," she said.
The FHA has recertified fewer than 10 percent of condo communities nationwide, Wooley said. In Las Vegas, a recent FHA sample found that only nine of 172 complexes were certified.
Few communities even bother to apply because association boards figure they won't pass FHA muster, Burlison said. Also, recertification can cost: Condo Approvals charges almost $1,000 to guide communities through the process, refunding half if the application fails.
But in certified communities, sale prices average $50,000 to $60,000 more, Eberhardt said.
"HUD is a gatekeeper providing access to those well-behaved condo associations who remember to put reserve requirements in their budgets and who are making sure their delinquencies are being paid," Eberhardt said. "Those folks are being rewarded hugely." The rest of the market is being punished as real estate agents skip uncertified communities.
There are some lending exceptions -- Fannie Mae and Freddie Mac have programs that offer federal backing to select units -- but as long as the FHA has the investor-owned guideline, the condo market will struggle, Burlison said.
"Lenders want to see a healthy association. They've been burned before where there have been significant amounts of investors," she said. "But that guideline is going to create a downward spiral until it's changed.''
To determine if your condo complex is certified, visit Condo Approvals' database at lasvegas.condoprescreen.com.
Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.
CONDOMINIUM PRICES
Real estate observers say the falloff is part of a market slump, but they also blame FHA rules that prohibit loans on units in communities with high numbers of investors or dues delinquencies.
| July 2006 | $201,500 |
| July 2007 | $195,000 |
| July 2008 | $135,000 |
| July 2009 | $67,000 |
| July 2010 | $68,000 |
| July 2011 | $59,000 |
FHA RECERTIFICATION SLOW
Most condo communities that need FHA certification haven't obtained it, making their units ineligible for federally backed loans.
| Needing Recertification |
Approved | |
| Las Vegas | 172 | 9 |
| Nevada | 246 | 16 |
Source: Federal Housing Administration
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I am unsure who this is news to but not me..... FHA buyers have been unable to purchase most condos for years due to litigation in most communities....
The rich get richer. Investors who are profiting from the recession will be buying up large numbers of condos at the lowest price possible once the market hits absolute bottom. Then sell them to the government for low income housing and/or create rentals and make a tidy profit. If the economy rejuvenates, they make money buy adjusting for current market value and selling. It's the American way. I do believe there is a negative consequence that comes to those who profit from the misfortune of others. So buyer beware! It's bad Karma to ignore the suffering family behind the cheap flip. How about some humanitarian investing? Do the right thing for the greater good.
Hate to say it, but this is yet another example of the game being stacked for the benefit of the wealthy. Only folks who can pay cash can buy, which are by definition the rich, which drives down prices, because only the rich can buy as there are not enough buyers – except the rich. Wonderful.
I thought that people wanted the gov to be more carefull with thier tax money??? what they are doing makes sense!!! can't have it both ways...let the private sector work, right??
Where I live the developer has come back in and bought up most of the foreclosed units. Now he controls the Board and everything else that goes on here. So the FHA will never loan for anyone to buy here. No mater the cost of the units. Have sent letters to everyone but they all tell me that nothing can be done. Even the AG's office could not help. By the time they realize that the rules need to be changed it will be too late. Tried giving my unit to Charity and could not even do that because of the current value.
I was just denied a mortgage refinance because more than 15% of my neighbors are behind on their HOA dues. This is in a Summerlin community. My credit is golden, I have ample cash on hand, and I've never been late on a payment. WTF does someone else's financial problems have to do with my ability to pay on time? Deny mortgages to the people who don't make payments on time, not those who do. I thought Obama was going to get us out of the home mortgage crisis, not deeper into it.
no worry. watch for the empty suit to create a rental commissar to make taxpayers landlords of last resort for any gubmit involved, defaulted loans. title 8 rentees coming to your neighborhood. that should add "diversity" to the neighborhood, schools, and "change" home values. welcome.... ex-offenders, kiddie diddlers, homeless, drug shooting galleries, single parents with a dozen bambinos, street gang headquarters, illegals in sanctuary... all are "entitled" to a taxpayer paid home.
This is actually not new info. I have been advising my clients for 3 years to steer clear of condos because they would not be able to resell them, or if they intended to resell, they may have to offer owner financing. And the restrictions regarding whether or not the unit could be even rented has been hanging over the HOA's heads for a long time as well. Their efforts to protect the HOAs have and continue to backfire.
One reader notes "see what happens when the Government gets involved"! I agree these NEW rules from FHA, like many government rules will only hurt condos. But the bigger question that is in the readers comment is whether the comment is only appropriate for now or is it an overall comment. Because without FHA, Freddie and Fannie those vacant condos probably could have never been built. And, there may not have been a 2008 meltdown in housing. And most people who owned homes in the last 30 years probably would have never been able to own a home. I would guess a large percentage of those people are happy to have their home. And, maybe if these successful homeowners never were never able to buy home that would OK too. So, when we make comments about how the Government should never be involved in ANYTHING (and I do think it is a largely incompetent organization) just remember to include the whole picture, not just the part that blows up.
Now one needs to ask why this state legislatures coddle the investors and dead beats this past legislative session making it easier for people to walk away be delinquent and not pay ones fair share. They wanted to make it easier for the investor to buy properties while at the expense of current paying owners. Time for the legislatures to remember the majority of the people, the people that are not investors making money in good times or bad times, just the people that want to be able to own their roof and pay their fair share in maintnance and not pay for the delinquent.