FHA Rules Common Condo Leasing Restriction Violates National Housing Act
CAI has learned the Federal Housing Administration (FHA) has determined a common restriction on transient leasing in condominium association CC&Rs violates a key section of the National Housing Act. To be eligible for FHA approval and recertification, FHA is advising condominium associations to amend CC&Rs to comply with the Agency’s minimum statutory requirements.
Many condominium association governing documents restrict leasing of units for hotel or transient purposes, normally defined as a lease with a term of less than 30 days. It is also common for condominium CC&Rs to provide an exception to the transient leasing prohibition for lenders taking possession of a unit as a result of foreclosure. After an extensive legal review, FHA has ruled this exception violates Section 513 of the National Housing Act, which strictly prohibits the use of FHA mortgage insurance to support transient or hotel housing.
FHA’s determination that exceptions to transient leasing restrictions violate federal law may be a significant barrier for condominiums seeking FHA approval or recertification. The National Housing Act does not provide either the Secretary of Housing and Urban Development or the FHA Commissioner authority to waive this statutory restriction.
CAI is conducting a survey of members to determine the full impact of FHA’s ruling on transient leasing exceptions. The survey will catalogue the number of condominium associations that permit lenders to lease units on a less than 30 day term as well as identify the geographic locations of affected condominiums. This information will be critical in determining next steps, which includes outreach to Congress.
CAI does not support federal agencies requiring that associations amend CC&Rs on an ad hoc basis to resolve minor issues such as lender transient leasing exceptions. Amending CC&Rs can be an expensive, arduous, and uncertain process. Federal agencies should explore all available options authorized by law to resolve minor issues rather than requiring associations to amend governing documents as a matter of course.
CAI notes that FHA continues to make progress on drafting a federal regulation to support its condominium approval process. CAI anticipates that upon the rule’s completion, which will allow for advance review and public comment, many condominium associations may opt to update CC&Rs to ensure compliance with new FHA guidelines. CAI believes that condominium associations should be afforded opportunity to consider amendments to transient housing lease restrictions at that time without losing eligibility for FHA certification.
Congress should provide the FHA Commissioner limited but sufficient authority to waive statutory restrictions for condominiums granting lenders an exception to transient leasing prohibitions as there are no indications that doing so poses a threat to condominium associations, homeowners, or taxpayers. A congressionally mandated waiver will provide FHA the opportunity to complete its rule-making and permit condominium associations to update CC&Rs on a comprehensive and rational basis to ensure compliance with FHA statutory and program guidelines.
Community Associations Institute (CAI)
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