FHA condo lending rules threatening stalled market

Las Vegas condominium owners already reeling from huge drops in property value face a new financial threat from federal rules that drastically limit who can buy them out.

Thanks to high numbers of investors and association dues deadbeats, the majority of Clark County's 90,000 condos are now or could soon be off-limits to most buyers, setting up a vicious cycle that could depress prices even more. Adding insult to injury, condo owners with some federally backed loans are no longer eligible for refinancing.

Behind the latest condo-market woes are regulations from the Federal Housing Administration, which guarantees mortgages that banks wouldn't otherwise write. The FHA denies loan guarantees on entire condo communities if more than half the units are owned by investors, or if more than 15 percent of owners are behind on association dues.

Exact figures are unavailable, but that means a growing number of condo sellers are cut off from most buyers.

Jon Eberhardt, president of FHA certification company Condo Approvals, says 80 percent of today's first-time home buyers purchase with FHA guarantees.

Paula Burlison, of Coldwell Banker Premier Realty in Las Vegas, adds that FHA borrowers comprise 70 percent of all buyers purchasing with mortgages.

The policies haven't helped an already battered condo market. The median local condo sales price was $59,000 in July, according to the Greater Las Vegas Association of Realtors. That's down 13.2 percent from $68,000 in July 2010, and 71 percent from $205,000 at the market's mid-2006 peak. Market values overall have fallen 9.6 percent in the past year, and 61.3 percent since mid-2006.

Burlison said she sees condos selling today for as little as $25,000, and Clark County reported in 2010 that more than 10,000 condos were standing vacant.

"It's the law of supply and demand. Because we cannot finance these properties, the number of people who can buy them is much lower, and supply has gone up," Burlison said.

The problem is even bigger in condo communities that restrict rentals, where owners can't sell to FHA borrowers or even to investors who would rent units out. They have more vacancies than their unrestricted counterparts so prices have dropped more, Burlison said.

The trouble started in 2008, when the federal Housing and Economic Recovery Act required regular reviews of condo communities to help protect taxpayers by evaluating whether units are safe prospects for federal backing. The prior policy called for only periodic recertification that "no conditions exist which would present an unacceptable risk to the insurance fund," said Lemar Wooley, a spokesman for the U.S. Department of Housing and Urban Development.

Checkups based on late dues and investor numbers especially hurt Las Vegas. Local unemployment was 13.8 percent in July; throw in discouraged and under­employed workers, and joblessness jumps to nearly 25 percent. So dues delinquencies are high.

What's more, up to 60 percent of local condo buyers are cash investors, said Leslie Sherman, director of education for Realty Executives of Nevada. That means many condo communities run afoul of the FHA rule barring investor ownership of more than 50 percent.

It's a self-perpetuating problem, Burlison said: Close off a community to owner-occupiers with too many investors and it'll get more investors -- placing re­certification farther from reach.

"Until the guidelines change, or until something changes in the marketplace, it's absolutely going to get worse," she said.

The FHA has recertified fewer than 10 percent of condo communities nationwide, Wooley said. In Las Vegas, a recent FHA sample found that only nine of 172 complexes were certified.

Few communities even bother to apply because association boards figure they won't pass FHA muster, Burlison said. Also, recertification can cost: Condo Approvals charges almost $1,000 to guide communities through the process, refunding half if the application fails.

But in certified communities, sale prices average $50,000 to $60,000 more, Eberhardt said.

"HUD is a gatekeeper providing access to those well-behaved condo associations who remember to put reserve requirements in their budgets and who are making sure their delinquencies are being paid," Eberhardt said. "Those folks are being rewarded hugely." The rest of the market is being punished as real estate agents skip uncertified communities.

There are some lending exceptions -- Fannie Mae and Freddie Mac have programs that offer federal backing to select units -- but as long as the FHA has the investor-owned guideline, the condo market will struggle, Burlison said.

"Lenders want to see a healthy association. They've been burned before where there have been significant amounts of investors," she said. "But that guideline is going to create a downward spiral until it's changed.''

To determine if your condo complex is certified, visit Condo Approvals' database at lasvegas.condoprescreen.com.

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.