P.R. Laws Block Condos From FHA Loans
While condominium apartments financed with low downpayments through Federal Housing Administration (FHA) insured mortgages may make a comeback under the Trump administration, making it easier for buyers with moderate incomes to buy housing, local laws are preventing it.
The information came out during the recent Mortgage Bankers Association Conference at which Dan Rogers III, the U.S. Housing & Urban Development (HUD) Administration FHA Homeownership Center director in Atlanta, gave a presentation.
HUD Secretary Ben Carson recently reportedly said there are plans to revive the FHA condo financing program by easing its regulations. One of the changes would give a green light to financing individual units in condo buildings that lack FHA certifications.
Rogers told Caribbean Business, however, that condos in Puerto Rico may not be able to benefit from the easing of FHA condo financing programs because local laws have become a roadblock preventing HUD from granting the certifications.
To become certified, right now, condominium boards must submit information regarding financial reserves, insurance, budgets and numbers of renters, and a long list of other documents as well as comply with other requirements.
After the Obama administration enacted regulations in 2008 that were overly strict—primarily because of the housing meltdown resulting from the worldwide financial crisis—many condominiums in Puerto Rico lost their HUD certifications because they were unable to comply with the new requirements.
Nationwide, fewer than 7% of the condominiums and buildings today have FHA certification, meaning the vast majority are ineligible for FHA-insured loans, according to the trade group Community Associations Institute.
Wanda Vázquez, loan production vice president for EMI Equity Mortgage, said one of the problems is that HUD requires the condos’ plat map, showing the divisions in a parcel of land, and the side plan containing a legal description. She said a law passed in 2016 has made it more difficult to obtain those documents. “The government, for whatever reason, is not providing them,” she said.
But the biggest hurdle is that federal law requires condominiums to set aside 10% of their maintenance fees as a reserve, while local laws require a reserve of 5% for improvements, she said.
The federal government imposed the higher requirement to prevent derramas, a special charge collected from condo owners that is earmarked for special purposes, such as major roof or pool repairs. These charges are above regular maintenance fees. By contrast, the federal government estimates the 10% allowance is sufficient to cover regular and unexpected expenses.
“The [federal government] wants to avoid derramas because that causes condo owners to fall into delinquency and this is what they want to avoid,” Vázquez said. “[Some] condos do not use the reserve and still charge a derrama. Others use reserves for other uses other than improvements.”
She said the fact that many condominiums cannot get HUD certifications limits the kinds of loans that a buyer can obtain and affects the value of condominiums. “The client has to put in a bigger downpayment. But it also makes it more difficult for condo owners to sell an apartment and they end up selling it for whatever price they can get,” Vázquez noted.
—Editor Rosario Fajardo contributed to this story.