A majority of condominium developments in metro Denver have lost their eligibility for Federal Housing Administration financing, which could make it much harder to sell units in those projects.
“We will see a lot of people who will discover that their homes are basically unsalable,” said Norm Lewis, a loan originator at Peoples Mortgage in Lakewood. “It is a downward spiral that could easily be arrested.”
The U.S. Department of Housing and Urban Development once required that completed condo projects apply for approval only one time, but after the housing crisis, it began requiring renewals every two years.
To win approval, no more than 15 percent of units in a development can be delinquent 30 days or more on their association fees.
Additionally, half or more of the units in a development must be owner-occupied. And a condo association can’t be in litigation.
The tighter rules, implemented in 2009, are designed to protect the FHA, and by extension taxpayers, from future losses on condo mortgages, which took a big hit in the downturn.
They don’t apply to townhomes, where owners own the land under their units.
Deadlines to renew approvals were staggered throughout 2010 and 2011 to give condo associations time to comply.
A Denver Post analysis of HUD’s approval list found that only a third of condo developments in metro Denver were current. Two out of three developments had expired or rejected approvals on the HUD website.
In some areas, the situation is even worse. Of 14 condo developments listing a Commerce City address in the HUD website, only one had a current approval.
But the problem isn’t limited to areas hit hard by foreclosures. Denver’s high-end Spire and One Lincoln Park condo projects showed expired approvals on the HUD website.
About half of the condo applications for renewal and approval submitted during the past five months were rejected because they didn’t meet the requirements or lacked paperwork, said Amy Trujillo, director of the processing and underwriting division of HUD’s Denver Homeownership Center.
But it also appears many projects haven’t even tried to renew, though they face a more costly and complicated approval process if they don’t renew within six months of a registration’s lapsing.
Trujillo said approvals are getting rejected at a higher rate than renewals.
Reasons unclear
Real estate experts are divided on why so few developments have renewed their HUD approvals. Explanations range from a lack of awareness to resignation that a project won’t pass, so why bother.
“Not everybody has realized the impact it can have on their community in terms of resales. They are used to doing it once and not thinking about it,” said Terry Jarrett, president of the Rocky Mountain chapter of the Community Associations Institute.
Renewing an approval can cost $400 to $1,500 or more, depending on the size of a development and how much outside legal help is sought, Jarrett said.
Some associations are coping with empty units and a shortfall of association dues. Paying for a renewal may not make it to the top of a long list of priorities until an owner trying to sell makes an issue of it.
“Most of the boards don’t understand the consequences of not renewing. They will severely impact the value of their owners’ units,” Lewis said.
The FHA backs about a third of all purchase mortgages, up from less than 5 percent back in 2005.
But when it comes to mortgages that entry-level buyers use to purchase homes below $200,000, the FHA supports 75 percent or more of the market, Lewis estimates.
Sellers in unapproved projects will basically have two types of buyers available to them — those willing to pay cash and those who can qualify for conventional mortgages.
Cash buyers typically are investors who convert units to rentals, which pushes prices down. But condo projects with more than 50 percent rentals aren’t eligible for FHA approval.
“If you lose your FHA approval, it makes it a nightmare to try and find financing,” said Pete Holst, a lender at Megastar Financial Corp.
Some local credit unions will lend in unapproved developments, but they typically require buyers put 20 percent down, Holst said.
Conventional lenders are much stricter when it comes to condo financing than the FHA is, Lewis said.
“If you can’t pass FHA, you won’t pass conventional,” he said.
MisinformationCompounding the problem, many listing agents are improperly describing condo units in lapsed developments as FHA-approved when they are not, said Whitney Solomon, managing broker at Condo.com in Denver.
She pulled 343 condo listings in southeast Denver, and only 100 disclosed that the units were ineligible for FHA financing. Many described FHA approval when that wasn’t the case.
Although Solomon argues the FHA is being too strict at a time when the housing market needs leniency, listing agents need to do their homework and not misrepresent properties.
“Unfortunately a lot of agents don’t look that far into a listing,” she said.
Buyer agents said they will not even bother showing unapproved projects to clients using FHA financing, meaning some condo owners may have no clue why they can’t sell their property.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
