This week, I had to pass along news to a property manager that her condominium client was not eligible for FHA approval due to leasing restrictions. Upon receiving the news, she fired back an email stating that she challenged the assertion because the condominium has “always been FHA approved” and the legal documents have always contained that language.
She went on to say that most condominiums in the area have similar leasing restriction language because it is associations’ only recourse against a problem tenant.
We can certainly understand her frustration. The condominium was approved with FHA two years ago and the legal documents have not been amended. Here is my response email:
“I can understand your position and had already inquired with HUD before sending the email, below. However, because the condominium was approved two years ago does not mean that it was reviewed properly at that time nor does it take into account that there have been further clarifications to FHA’s guidance. I also agree with you that other condominiums have similar language; however, those with identical language would also not be eligible.
Unfortunately, the fact that it “has always been FHA approved” has no relevance to the current situation. We have had several condominiums that have been rejected by HUD that were approved just two years ago for leasing restriction violations. HUD changed the qualifications for condominium project approval in written form in 2009 and then again in 2011 and 2012. It provided written updates and clarifications to the guidance in 2011 and 2013. It provided verbal clarifications during the Roundtable Sessions that I attended in 2014 and 2015.
However, the underlying law behind all of it is the National Housing Act which is in the Code of Federal Regulations. In this Section of the Code, it creates the rules for FHA-insured loans. The Section pertaining to leasing restrictions is 24CFR203.41, which speaks to “free assumability”. HUD does not have to issue written policy on leasing restrictions because it is already there in the Code.
24CFR203.41(b) states: “Policy of free assumability with no restrictions. A mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance, except as permitted by this part.” You can read the Section of the Regs if you like; I linked to it above. The exceptions “permitted by this part” are subsections c-g and include:
- Eligible government or nonprofit programs and specific policies
- Tax-exempt bond financing
- 55+ communities
- Specific jurisdictions (Indian lands, certain Hawaiian home lands, etc)
24CFR203.41(a)(3)(i) states: “Legal restrictions on conveyance means any provision in any legal instrument, law or regulation applicable to the mortgagor or the mortgaged property, including but not limited to a lease, deed, sales contract, declaration of covenants, declaration of condominium, option, right of first refusal, will, or trust agreement, that attempts to cause a conveyance (including a lease) made by the mortgagor to:
(i) Be void or voidable by a third party;” [Emphasis added]
Section 14.1(k) of the Declaration of [name removed] condominium states: “if any Residential Unit Owner/lessor or lessee is in violation of any of the provisions of the lease, this Declaration or the condominium Rules and Regulations, the Association may bring an action in its own name or in the name of the residential Unit Owner/lessor, lessee or both, to have the lessee evicted or to recover damages, or both.”
Section 14.3 states: “The Association…shall have the rights of enforcement of any lease4 of a Residential Unit directly against the lessee(s) including, without limitation, the right to terminate any lease by reason of violation…”
Because the Association has the authority to terminate leases, it violates 24CFR203.41(b) “free assumability” which renders the condominium ineligible for FHA-insured loans. This also means that it is not eligible for project approval.
Furthermore, I inquired about the language in Sections 14.1(i) and (k) to verify compliance. In an email from the Philadelphia Homeownership Center:
14.1 (i) is acceptable.
14.1 (k) is unacceptable.
Beyond that, it would be escalated to HUD in Washington, DC. I verified this very information at the Roundtable on August 27, 2015. The Association cannot have the power to void leases; it can only levy fines for leasing violations.
Therefore, the condominium will have to remove Sections 14.1(k) and 14.3 in order to be eligible for project approval.”