Common Interest 360

This is good news for developer and resident controlled community associations. CAI reported today that:

• Servicers must advance funds to a community association when notified by the association that the borrower is 60 days delinquent in the payment of assessments or other charges levied by the association if necessary to protect the priority of Fannie Mae’s mortgage lien
• Servicers must ensure any priority lien for delinquent association assessments is cleared promptly (no later than 30 days) after a foreclosure sale or acceptance of a deed-in-lieu of foreclosure.
• Servicers are responsible for the continued payment of association assessments following a foreclosure sale.
• Servicers must take appropriate action to change tax rolls to reflect Fannie Mae ownership following a foreclosure sale or acceptance of a deed-in-lieu of foreclosure.
• Servicers must contact the community management company or association to ensure that all bills for assessments or other association charges are forwarded to the servicer.
• Servicers must pay all association bills as they come due.

What does all this mean?  It means several things: 1) You SHOULD include a lender notification at the 60 day delinquency mark OR EARLIER; 2) your association, management company, or lawyer SHOULD research the lien status of the property AT THE 60 DAY MARK OR EARLIER and SEND THE NOTICE TO THE LENDER (I said that, but it is worth repeating); 3) your assessment collection process should notify lenders AT THE FIRST STEP OF THE COLLECTION PROCESS.  You do not do this, you may lose the opportunity to collect delinquent revenue.

Recommendations: 1) revise your collection policy to include a lender notice; 2) do some title research-this is how you find out, or at least, get the sniff that the loan is guaranteed by Fannie Mae; and 3) make sure whoever is collecting your delinquent accounts is proactive and creative. YOU SNOOZE YOU MAY LOSE !  

How does this intersect with the new mandatory payment plan requirements of the 2011 Texas HOA Reform Laws?  If it is a Fannie Mae insured mortgage, looks like you have a shot at the lender/servicer paying rather than the homeowner IF the proper notice is provided.  It is not guaranteed in Texas since Texas is not a lien-priority state, but I believe it will increase the odds the assessment will be paid.

For you developer-controlled communities, this means if you have a good collection policy with lender notification, your developer subsidy may reduced.  It’s all about the Benjamin’s, keep some in your pro forma with a thoughtful and proactive collection policy. 

The Fannie Servicer Update is here.  Fannie Mae encourages servicers to comply with these standards now but no later than July 1, 2012.

With the rise in interest in community associations and community association living (both positive and negative), we thought it would be interesting to briefly outline a few important moments in the origin of the community association.

Based on data compiled by the Community Association Institute, in 2011, 62 million Americans were members of a community association, a 2,866% increase from data compiled in 1970. The growth of community associations over the last 40 years is a response to changes in our society, the expectations of home ownership, and competitive pressure. As a response to expectations and competitive pressure, developers began to build specialized amenities and adopt specific rules for their developments. At the same time, fiscal contraints have forced municipalities to focus on core services–there is a limit to the tax burden their constituents will bear. These trends, among other factors, have conspired to create a financing and regulatory gap for the community association to fill.

We spend most of our time with the day-to-day administrative and management needs of the community association. Let’s step back for a moment and look at a few important events in the rise of the community association.

• Late 18th Century: London institutes the practice of maintaining private parks with funds provided through subscriptions from or trusts composed of adjacent land owners.
• 1831: Samuel Ruggles, a New York developer, lays out Gramercy Park. The park is conveyed to a trust for the benefit of adjacent lot owners who are charged with maintenance and upkeep (Assessments!).
• 1844: 24 lot owners executed an agreement to maintain, in perpetuity, Louisburg Square in Boston (Association!).
• 1871: Based on advice from Fredrick Law Olmstead, setback and construction restrictions were imposed on the Riverside residential development in Chicago, Illinois (Restrictions!).
• 1890: Edward Bouton incorporated use restrictions in the Roland Park development in Baltimore, Maryland.
• 1914: J.C. Nichols created the first mandatory membership association in the Mission Hills development in Kansas City, Missouri.
• 1929: The Ohio Supreme Court in Dixon v. Van Sweringen upholds the enforceability of private covenants.
• 1934: Congress creates the Federal Housing Administration. The FHA, in conjunction with its mortgagee guarantee program, encouraged developers to incorporate deed restrictions and mandatory associations within their developments. The Veterans Administration, created in 1944, adopts similar recommendations.
• 1951: Puerto Rico adopts the first condominium statute within the United States or its territories. The statute calls for the creation of a council of owners to administer and maintain common area.
• 1962: Congress adopts the National Housing Act which makes FHA mortgage insurance available to condominium unit owners. FHA publishes a model condominium statute. By 1967, almost every state had adopted a legal framework for condominium ownership. Each statute calls for the creation of an organization to administer and maintain common areas.
• 1978: Voters in California approve Proposition 13 which limits the ability of local government to raise property taxes to cover the costs created by new development. As a consequence, local officials require that certain local services be provided by private property associations. This trend in “load shedding” by municipalities, as a pre-condition to the development approval process spreads to other states.

So there you have it. Once the proverbial cat was out of the bag, amenities such as pools, sidewalks, parks, community centers, ball fields, etc., were no longer a burden shouldered by the taxpayers at-large.   Rather, such amenities were initially installed by the developer. But who would pay to maintain such items once the developer was gone? And how? The residents of each community through assessments levied by their community association.  These new private “taxpayers” have enabled community associations, and the amneities they provide, to grow and thrive.

On Thursday, February 23, 2012, FHA published a request for comments to a proposed rule which will place limits on the amount a seller may pay toward a homebuyer’s closing costs.  In FHA parlance, these contributions are referred to as “seller concessions.”  Currently, seller concessions are limited to 6% of the home sales price.  The proposed rule would limit seller concessions to the greater of $6,000.00 or 3% of the sales price (but such amount may not exceed the buyer’s actual closing costs).

The proposed rule also narrows the definition of acceptable seller concessions to exclude HOA assessments and other payments usually made by the buyer post-closing, such as mortgage interest.  In essence, FHA is now proposing to clearly characterize the pre-payment of HOA assessments as an “inducement to purchase” rather than a closing cost. The seller’s payment of a buyer’s closing costs has always been permitted (within the FHA limits noted above).  However, FHA has had a long-standing rule that an inducement to purchase reduces the loan amount available to the buyer.  In other words, if I offer you a car as an incentive to purchase a home, the home’s value (for the purpose of determining the loan limit) is actually equal to the home sales price less the value of the car.

Interesting Statistics From the Request For Comments-

• 65% of all FHA loans involve seller concessions.  FHA notes that this percentage has not changed as a result of the housing downturn.
• By far, the highest defaults occurred for loan amounts greater than $360,000.00 when the seller concessions were 4% or more of the sales price.
• FHA market share in 2007 was 3.4% (77 billion in insurance issued).  In 2010, FHA market share has increased to 17% (33% of all home purchase mortgages and 319 billion in insurance issued).
• 70% of loans up to $180,000.00 have closing costs which exceed 3% of the loan amount.  For loans above $240,000.00, only 26% have closing costs which exceed 3% of the loan amount.
• 82% of all buyers who obtain FHA insured mortgages make only the minimum down payment of 3.5%.

Comments to the proposed rule are due by March 26, 2012.