Condo Media - May 2010 - 47

loans, on which an increasing number of homebuyers are relying. “I’m getting constant calls from banks asking about the status of litigation,” Allcock says. “Even small matters” can derail a loan, agrees Aronson. “If there is any litigation at all pending in a community association [other than collection actions],” she notes, “lenders are refusing to approve the loan.” The litigation of concern to lenders includes both suits filed against the association and those the association has initiated. As a result, Aronson and Allcock are both advising boards to weigh the potential negative impact on the marketability of units within their community when considering whether to file suits or defend against them. “If we’re talking about a multimillion dollar construction defect claim,” Allcock says, “there’s not much to tell boards” other than to proceed with the claim “But if it’s a $10,000 water

leak,” he says, “the board may just want to get rid of it,” to remove what will be an underwriting red flag for many lenders. Boards that follow this advice have to be prepared to explain to owners why they are settling suits they would ordinarily fight, but the explanation is straightforward, Allcock says. Fighting a suit or filing one “may make it harder for owners to sell their units or refinance their mortgages.” Like the FHA, Fannie Mae and Freddie Mac also have tightened their requirements for the residential mortgages they will purchase from lenders, in response to massive loan losses resulting from the lax underwriting that prevailed for the past several years. Many community associations are bumping up against the 15 percent owner delinquency cap Fannie and Freddie have established, as lenders are denying condominium loans in communities where delinquencies exceed

that maximum. Allcock says he has heard of situations in which owners trying to sell their units will make the delinquent payments of other owners in order to remove a roadblock that is preventing a prospective buyer from obtaining a loan. These lending restrictions and others are already having a noticeable impact on the marketability of condominiums, Aronson and Allcock agree. And the impact will become more noticeable and more problematic, they say, as the market improves and more buyers and sellers encounter financing obstacles. “I think [some of] these lending rules will eventually have to be repealed,” Allcock predicts. “That’s the only way the condominium market will ever recover.” CM Nena Groskind is vice president of eContentplus, providing editorial content for Web sites, print and electronic newsletters and magazines.

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