FHA Has Revised its Requirements for Project Certification

September 13, 2012

By Curtis G. Kimble.

The Federal Housing Administration (FHA) today released a revision to its condominium project certification requirements.  There are a few changes to certain requirements that have been preventing or hindering associations that I’ve helped from obtaining FHA certification.

One change will certainly help regarding delinquencies.  Now, no more than 15 percent of all units may be more than 60 days delinquent.  Previously, the requirements prohibited 15 percent of the units from being 30 days delinquent, which was far too strict.  The change to 60 days is much more realistic and logical.

The fidelity insurance requirements have been adjusted slightly for professionally managed associations and may make it a little easier to comply with these requirements.

Finally, the requirement that no more than 10% of the units could be owned by one person or entity has caused difficulty for many associations.  That requirement has been changed for established projects.  A single person or entity may now own up to 50% of the total units as long as 50% of the units in the project are owner-occupied, principal residence units.

So, the changes provide some limited and welcome relief, but not much, and they definitely don’t provide the broader changes or relief many associations were hoping for.

Remember, certification expires every two years and you’ll want to plan ahead a couple of months at least to arrange for applying for re-certification.  Contact us to help your condominium association obtain certification or re-certification of your project.  While it can be challenging to obtain certification, it’s certainly possible for just about every association, and the benefits are well worth it.

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Fidelity Insurance – Is Yours Adequate?

September 6, 2012

By Curtis G. Kimble.

What would your association do if you discovered tomorrow that the association’s bank/investment accounts had been completely emptied by a board member and it was obvious that the association would not be getting the money back?

Levying an immediate and large special assessment wouldn’t solve all the problems this situation would create and is an incredibly hard pill to swallow for homeowners in this circumstance.  The association’s fidelity insurance is the key source of hope here.  Fidelity coverage is often called “employee dishonesty” coverage, and that phrase sums up its purpose quite well.  It protects against theft or embezzlement by employees or officers of a company.

However, one important issue could prevent the insurance company from paying out under your policy – volunteers.

Utah law now has detailed insurance requirements that apply to policies issued to Utah homeowners associations (HOAs).  These laws specify the property and liability coverage required for an HOA’s master policy.  But they do not require or mention fidelity coverage.

So, very often, the coverage of an association’s fidelity insurance policy or bond will simply mirror the fidelity coverage required by the association’s CC&Rs.  This is because insurance companies often make coverage determinations based on what coverage the CC&Rs require.  However, many CC&Rs were not written with an adequate understanding of fidelity coverage in an HOA context, so they simply require fidelity coverage in the same form as any company or corporation would carry.

The problem with that is that typical fidelity coverage for a company only covers paid employees, not volunteers.  This is a square hole and round peg situation.  HOAs are not typical companies or corporations.  HOAs are generally served primarily by volunteer officers and directors, and their fidelity coverage needs to reflect that.

So, CC&Rs have to be carefully written to require coverage of volunteer board members and officers and any other volunteers handling the association’s money.  Additionally, a board should be careful to ensure that their policy for fidelity coverage includes an endorsement modifying the coverage to include volunteers.

If your association is professionally managed, it is important to understand that a property management company’s own fidelity coverage does not necessarily protect a client homeowners association, it protects the management company itself from loss of its own funds.  So, the association’s fidelity coverage should also include coverage for the property manager handling association funds.  This is also typically done through an endorsement (which is like an addition or addendum) to the original policy.

Condominiums maintaining or applying for FHA certification (so the units can be purchased with FHA-backed loans, which account for a majority of purchases today) should be aware that FHA requires an association to carry fidelity coverage in an amount no less than three months aggregate assessments plus reserves.  That amount of coverage is good practice for any association.  Fannie Mae and Freddie Mac also have requirements for fidelity coverage.

Finally, it’s also important not to confuse fidelity coverage with director’s and officer’s (D&O) insurance, which protects the association when it is sued for the “wrongful acts” and decisions of its board of directors or officers, and which is also crucial for every association.


FHA Status Impacts Condo Owners Ability to Sell Their Units

February 6, 2012

By Curtis G. Kimble

I thought I’d share this article from the Salt Lake Tribune so that any of you out there feeling frustration over the difficulties the FHA certification process is causing to buyers and sellers of condominium units, as well as the boards of condominium associations, can commiserate knowing you’re not alone:  Thousands of condo owners stuck in condos they can’t sell | The Salt Lake Tribune.

A few years ago, a condominium board may have never heard of certifying their condo project under the Federal Housing Administration (FHA).  The FHA insures private sector loans used for the purchase of a home, so that, under an FHA backed loan, the government helps cover losses to the lender when the borrower can’t pay his or her mortgage.  A few years ago, these loans could be obtained on a unit by unit basis.  Additionally, only about 3% of condominium mortgages were FHA backed five or six years ago.

Now, FHA backed loans have become one of the only options for many borrowers.  But, the whole condominium project must be certified with the FHA before any units within it can be bought with FHA loans.  And today, more than half of new condominium mortgages are FHA loans, making FHA certified status extremely valuable for a condominium project.  Even for buyers not interested in an FHA loan, FHA certification tells a buyer that the condominium association has met certain standards which help ensure the long-term financial viability of the association.

The problem is that the process to get FHA certified is rarely easy.

We routinely help condominium projects throughout Utah obtain FHA certification.  The problems we see the most are inadequate fidelity insurance coverage (not enough coverage or the policy doesn’t name the specific property management company as a covered entity), not enough reserves, too many delinquencies, and having a transfer fee in the governing documents.  If the association has a pending special assessment, is involved in major litigation or has a bank loan, these issues may also prevent the association from becoming certified.

The process for obtaining certification can take anywhere from a couple of months to a year or more.  To make matters worse, the certification expires every two years requiring the association to go through the certification process again and again.    However, obtaining FHA certification can have dramatic benefits to the salability and property value of the units within a project.

The possibility of obtaining FHA certification should at least be examined by every condominium board to determine if it’s feasible for their association.  If the association becomes FHA certified, it will make all the difference in the world to the buyers and sellers of units within the association, as well as to owners of units wishing to refinance with an FHA loan.

Contact us if you’d like help certifying your association with the FHA.


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