Perhaps one of the most difficult aspects of the recent recession was the sudden evaporation of credit from major banks and lending institutions. The logic behind it was understandable: too much easy credit had led, in part, to the collapse that stunned the nation and then the world starting in 2008. Although the New York housing market was less affected than that of other states such as Florida and Nevada, it still felt the shifts. Among the repercussions was a new set of regulations issued in February 2010 by the Federal Housing Administration (FHA) which created a number of requirements for any building that wished to accept FHA-backed mortgage loans.
A Bit of Background
The Federal Housing Administration was born during the Great Depression, created by Congress in 1934 and absorbed by the Department of Housing and Urban Development’s (HUD) Office of Housing in 1965. The main purpose of the FHA is to provide mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. The FHA insures mortgages on single family and multifamily homes, including condominium communities. According to the FHA website, it is the largest insurer of mortgages in the world, insuring more than 34 million properties since its inception. That number currently includes 4.8 million insured single family mortgages and 13,000 insured multifamily projects.
As the FHA website explains, “FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans. The lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s default. Loans must meet certain requirements established by FHA to qualify for insurance.”
A Change in the Process
In February 2010, that list of regulations grew for condo communities with new requirements issued directly by the FHA as a result of housing situation that helped spur the recession. One requirement that has had a definite effect on New York condos is a regulation relating to a building’s reserve fund. “The guideline is that a condo development must have 10 percent of its yearly budget set aside for reserves,” says Orest Tomaselli, CEO of National Condo Advisors LLC in White Plains, a company which offers condominium project loan approval and reserve analysis services.
That means, says Tomaselli, “If a budget is $100,000, it must set aside $10,000 a year in a reserve account.” The goal behind this guideline is protective. “You don’t want a development to get into a situation where it can’t pay for necessary repairs. You’re trying to avoid special assessments.”