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Headed Toward a Cliff: Losing Your FHA Eligibility

I am surprised that I have not heard more about the risk of communities losing FHA eligibility amidst COVID-related delinquencies.  According to a recent article from CAI, the FHA will not secure mortgages in communities with greater than 10% delinquency.  A delinquency rate of 10% was unthinkable one year ago, but many communities are now at that point, but (and this is a big BUT) they may not realize it.  The reason is that mortgage forbearance programs and government stimulus have helped owners remain current on their assessments.  These programs won’t last forever, and we will know the real unobscured delinquency rate when they expire. 

According to CAI “one in 10 homeowners are unable to make mortgage and related payments as a direct result of the COVID-19 national emergency.”  Let me help you with that math; it’s 10%.  See how easily your community could fall out of compliance with FHA requirements?

If you are unfamiliar with FHA requirements and benefits, take a look at these recent articles from the Community Association Institute and The Washington Post.  Access to FHA-backed loans is an important element of competitive financing and property values.  Simply stated, if you lose your FHA eligibility, your property values go down.

Sadly, many boards and managers are acting as if delinquency rates will not change.  To make matters worse, a large number of communities have placed an indefinite “hold” on collections during COVID-19.  These communities are creeping close to the edge of the FHA cliff. 

Prudent communities are making preparations now, before it is too late.  Proactive measures that can help communities address delinquencies come down to three elements:

This strategy ensures you are taking appropriate fiduciary action during an extraordinarily unusual time.  The alternative, which appears to be the “do nothing” strategy (which is still doing something) puts your fate in the hands of the economy.  Or the government.  Or the gods.  Who knows, but it certainly defies fiduciary scrutiny.  I couldn’t put it any better than The Washington Times:

“A condo board has a fiduciary responsibility to its owners to maintain the financial health of the association,” Knull says. “If a board permits the percentage of delinquencies to grow and remain uncollected, it is failing to properly discharge its duty to the condo association’s owners. Encountering condo projects with excessive delinquencies is a turnoff to buyers, who see no upside to voluntarily incurring financial risk by purchasing in a community that doesn’t seem well managed or financially responsible.”

Effective collections are an important element of financial health. As you review the effectiveness of your collections, consider getting standardized bids on an annual basis. If you would like a free collection RFP template, email us at [email protected] 

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