This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Pete Farley's condominium is tidy, updated, clean and in a good neighborhood. And with a listing price of just under $175,000, it is affordable to most buyers.
All of those things should make it an easy sell in today's real estate market. Instead, the condo unit is largely unsellable.
The problem is that Farley's condo community lacks certification from the U.S. Federal Housing Administration. And without that seal of approval, buyers with FHA-insured loans and some with other types of loans aren't able to purchase it.
Farley's Realtor, Jan Lowe, estimates there are thousands of other condo owners in projects along the Wasatch Front in the same bind. Some, such as Farley and wife T Kay, who want to move somewhere with warmer winters, remain stuck in units they can't sell. Others, who have to move, try to rent out their units; still others have to walk away and let their properties fall into foreclosure.
"These days, I'm as much of a grief counselor as I am a real estate agent," Lowe said.
According to the FHA, of 205 condo communities in Salt Lake City, only 59 have active FHA certification. Some projects are trying to get certified for the first time; others are trying to get recertified after allowing their certifications to lapse. There are those with no hope of getting certified.
The FHA, part of the U.S. Department of Housing and Urban Development, provides insurance that encourages private-sector lenders to make loans. In the event of a default by a borrower who cannot pay his or her mortgage, the government steps in to cover a portion of the losses.
During the boom years of the early 2000s to the housing market's peak in 2007, FHA-insured loans made up only a small fraction of the overall home-sale market. There was an ample supply of other sources of funding that didn't require government partcipation. Because of that, many condo associations didn't bother getting certified with the FHA.
In the years since the nation's foreclosure crisis has taken hold, many of the other sources of loans have disappeared, and FHA loans have become one of the only options for many borrowers, especially those with small or no down payments.
The idea behind certifying condos is that defaults are often lower in communities with well-run homeowners associations, those with ample cash reserves for repairs and emergencies or those with high shares of owners living in their own units instead of renting them. In recent years especially, the FHA wants to avoid insuring mortgage loans in condo communities with poorly run associations that have little in the way of reserves or a big share of renters.
The Farleys didn't expect any issue with their homeowners association it is active and has adequate cash reserves and their community also has few renters.
But the dilemma for communities is that their homeowners associations must now apply for FHA certification renewal every two years. The Farley's association, like so many along the Wasatch Front, let its certification lapse last summer. Although it has since reapplied, it is discovering that the process is more complex and time-consuming than ever. Some associations must wait months even more than a year to get through the paperwork.
Salt Lake City developer Ken Millo found that out the hard way. He said it took nearly two years to get FHA approval for the first phase of his Broadway Park Lofts condo development in downtown Salt Lake City. He blames the wait, which didn't end until early last year, for contributing to his inability to get many units sold. Also faced with the downturn in the residential market, Millo eventually had to conduct an auction to sell units in the first phase and begin work on the second.
Among the many reasons for the long process is the growth in popularity of the FHA loans, which is taxing agency resources.
The FHA, hoping to keep default rates at reasonable levels, has stepped up efforts to more thoroughly scrutinize condo projects and communities before allowing borrowers with FHA-insured loans to buy in them.
Adding to the delays is the requirement that condo homeowners associations recertify every two years, instead of it being a one-time event, which began in 2009. The FHA also did away with a lot of exceptions. In the past it would occasionally allow a buyer with an FHA loan to acquire a unit in a non-certified community, a practice that has ended.
That means that for the time being, the Farleys need to find a buyer who can pay cash or can qualify for a conventional mortgage loan from a lender who isn't concerned about the community's lack of FHA certification.
Either way, those types of buyers are few and far between.
"This is such a big problem, but the general public has no idea this is going on," said Salt Lake City mortgage lender Mike Wondergem. "Many condo associations don't even know about it until someone tries to sell a unit."
Salt Lake City real estate broker Babs De Lay said the FHA dilemma mostly affects sellers of units priced at $200,000 or less. That's because many buyers in that price range don't have a down payment of 5 percent or more, depending on a number of factors required to qualify for a conventional loan.
"It can mean that even if you want to move, you are going to be living in your condominium for a long time until the market gets better or the rules change," she said. "Or you're going to have to rent it out."
A number of condo homeowners associations have caps on the number of units that can be rented, rendering that option impossible, she said. "It can be devastating."
Steve Gold is in that situation. He's been trying to sell his mother's condominium unit in Bonneville Towers in downtown Salt Lake City since summer, when his mother moved into a nursing home.
The community's FHA certification lapsed last year, and although the homeowners association has applied for recertification, months and months drag by without an answer.
Gold has received two offers, both of which fell through because the buyer's mortgage company didn't want to offer a loan in a building that isn't FHA-approved.
He has considered renting the unit, but there is a waiting list for the privilege.
"We can't sell it, and we can't rent it, " he said. "It's not a good situation."
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