Jersey Shore buyers with FHA-backed loans find fewer communities where they can buy

Dec. 14--A growing number of condominium and residential communities in central New Jersey are skipping an important government certification that would expand the pool of buyers, real estate experts and consumer advocates say.

Either unable or unwilling to apply for certification with the Federal Housing Administration, these communities can't accept buyers with FHA-insured mortgages. It's a segment that can buy homes with down payments of as low as 3.5 percent.

"It limits that lower down payment person from purchasing there," said Al Veltri of Veltri and Associates Realtors in Brick. "I think the association and their members need to be up in arms over it."

The trend is a remnant of the housing bubble's collapse more than five years ago. Faced with steep losses from borrowers who defaulted on their loans, the FHA began to tighten its approval standards.

Some observers think the move backfired on an agency established after the Great Depression to help the working class purchase homes. The problem isn't that there are not enough first-time home buyers and lower-income residents who qualify for the loans. It's that there are fewer places that will take them.

"It's removed a chunk of affordable housing from the market for people who really need it," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, a consumer advocate.

Leisure Village West is an 55-and-older community in Manchester with about 2,700 homes and 4,400 residents. When its FHA certification expired in 2011, Crossroads Realty took out a full-page advertisement in the community's monthly newspaper urging residents to turn their attention to the issue, said Dawn Marie White, manager of Crossroads in Manchester.

Two years later, nothing has changed. "Homeowners don't seem to get on board about having that approval, which, as far as I'm concerned, eliminates a handful of buyers who would consider Leisure Village West," White said.

An employee in the management office at Leisure Village West declined to comment.

Yet Leisure Village West is far from alone. Weybridge Condominiums in Wall saw its FHA certification expire in April. Twelve condominium complexes in Freehold that once could accept FHA buyers no longer are qualified, according to the FHA database.

Out of 157 communities in Monmouth County listed in the FHA database, 61 percent have had their certifications either expire or rejected. Out of the 110 communities in Ocean County, 75 percent have had their certifications either expire or rejected, according to the database.

It isn't enough to bring this market to a standstill. As of Monday, White noted Leisure Village West had just 37 active listings, which amounts to less than three months of inventory. Before superstorm Sandy, the community had a year's worth of inventory.

But prices in Ocean County have lagged, despite an increase in sales. As of November, the median price of a single-family home over the past 12 months was $252,000, down 6.7 percent from the previous year. And the median price of a townhouse and condominium was $170,000, down 5.6 percent, according to the New Jersey Association of Realtors.

FHA-backed loans rising

The FHA insures loans made by lenders approved by the U.S. Department of Housing and Urban Development, helping offset some of the risk. They are particularly popular among first-time home buyers. The 3.5 percent down payment is much lower than the 20 percent down payment that conventional loans require. The money for the down payment can come from a gift. And borrowers aren't penalized as much for having a lower credit score, said Jim Brown, senior vice president of residential lending for Colonial American Bank in Shrewsbury.

(Brown noted borrowers can put less money down for a conventional loan, but they would have to pay for private mortgage insurance.)

The loans fell out of favor in the mid-2000s, when more buyers turned to unconventional loans. But they re-emerged after the housing bubble collapsed and lenders tightened their standards. The result: Buyers with FHA-insured loans increased from 3.8 percent of purchases in 2006 to 19.1 percent in 2010. In fiscal 2012, they made up 15.6 percent of purchases, according to government data.

As more borrowers with FHA-insured loans entered the housing market, though, their choices have dwindled.

The FHA once approved borrowers themselves. But stung by loans that went into default, it changed gears in 2009 and required homeowner associations to apply for certification, ensuring the associations were financially strong and properly managed. In essence, it wanted assurance that if it had to take control of a foreclosed home, it wouldn't have much trouble reselling it. The certification needs to be renewed every two years.

The FHA in September received $1.7 billion from the Treasury Department to cover anticipated losses in its insurance fund.

Certification troubles

Ronald Perl, a lawyer with Hill Wallack, said homeowner associations are having trouble getting certified. Among the reasons:

--The economy. The FHA requires that at least 50 percent of the units be occupied by the owner instead of a tenant. No more than 15 percent of the units can have owners who are delinquent on their loans. And homeowner associations must have money in reserve that amounts to 10 percent of its annual budget. The recession and slow recovery has made those standards more difficult to meet.

--Lawsuits. The FHA raises red flags when it sees litigation. It may deny certification if a homeowner association sues the developer because of construction defects. It may think twice if homeowners sue the association for slips and falls, double-checking to make sure it has enough insurance.

--Paperwork. The FHA rejected applications from 45 associations in Monmouth and Ocean counties because of what it said were missing documents or an incomplete package submission, according to its database.

--Redlining. Some associations aren't bothering to apply, thinking FHA borrowers aren't as deep-pocketed as borrowers who get conventional loans and will lower the standards of the community. But experts said it is a mistake. The FHA can approve loans of up to $729,750 in Monmouth and Ocean counties.

"It's amazing to me, yet I've heard some associations just don't like the idea of FHA buyers having access to the community," Perl said. "By not having project approval, they cut out a whole potential set of buyers that could come in and actually increase property values."

Michael L. Diamond; 732-643-4038; [email protected]

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