One of the causalities of the real estate downturn has been the condominium homeowners association.
No one could predict five years ago when condos were selling like hot cakes that loose lending and rampant speculation would wreak havoc on a building’s Home Owners Association (HOA) and inhibit future buying and selling of its condominiums. Many of the condo and townhome communities’ HOA’s become victims during the real estate downturn as homeowners who were upside down in their mortgages defaulted on their debts and stopped paying their fees to the HOA.
These deficiencies left communities in financial straits without adequate funds to maintain and run the projects. In fact, many projects fell into disrepair by cutting amenities and services or passing shortfalls to current paying resident to cover the deficiencies in the form of higher HOA fees or assessments.
As a reaction to the financial Chernobyl in 2008, lenders tightened loan requirements across the board including condo and townhome financing. These new regulations were driven by revised Federal National Mortgage Association (Fannie Mae) standards. Fannie Mae purchases the majority of residential mortgages originated by local lending institutions. This provides liquidity for the local lenders to make home loans and is often referred to “secondary mortgage market.”
When Fannie Mae’s financial stability was threatened, it responded by tightening its standards for the loans it would consider purchasing, the guidelines for lending in a condo or townhome became very stringent. One crack down Fannie Mae made was the amount of monthly income that HOA’s had to allocate to the association’s reserve budget.
The reserve fund is an HOA’s rainy day fund that allows buildings the necessary funds for large expenses such as roof repair, HVAC replacement, or electrical system refurbishment. Fannie Mae also put a cap on the percentage of foreclosures and defaults that were allowed in a building. These stricter lending guidelines made many projects “unwarrantable.”
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Source: Atlanta Business Chronicle