FHA FINANCING ALERT FROM ORANGE COUNTY ASSOCIATION OF REALTORS

REALTORS® in Orange County who represent sellers and buyers of homes in the communities of Ladera Ranch, Talega, and San Clemente should understand the “community enhancement fee” required to be paid at the time of close of any escrow or purchase.

Often described as a “lifestyle” fee, these private transfer fee obligations are a recorded covenant running with the land obligation of the sellers. Payment of this fee obligation is according to a recorded covenant and cannot be avoided.

Such recorded community enhancement fees commonly have language such as: “By its acceptance of a deed with respect to any residential Unit (as such term is defined above), the Owner of such Unit is hereby deemed to acknowledge and agree to the requirement that any Owner transferring title to such Unit shall pay to the Association a Community Enhancement Fee in an amount not to exceed one-fourth of one percent (0.25%) of the gross sale price of the Unit. By its acceptance of a deed with respect to any residential Unit (as such term is defined above), the Owner of such Unit is hereby deemed to acknowledge and agree to the requirement that any owner transferring title to such Unit shall pay to the Association such Community Enhancement Fee. Certain exemptions apply.”

So even though FHA and government-backed loans have been made by lenders in these communities for more than 10 years, HUD has recently said that such government-backed loans are no longer authorized where there are required private transfer fees.

HUD (U.S. Housing and Urban Development) representatives have recently said: “Ladera Ranch is one of many master planned communities where mandatory private transfer or other transfer fees are required upon each conveyance of the property. This includes single-family dwellings, townhouses, PUDs, MH and condos.  Per the regulation at § 203.41, private transfer or other transfer fees are not authorized. This rule was promulgated in 1994 and announced via Mortgagee Letter 04-02 and, according to HUD, the “requirements of the rule are still applicable.”

So despite HUD not enforcing its own regulation after more than 10 years in Ladera Ranch and Talega, such purchase money loans will no longer be insured or purchased by HUD. And unless it backs off on its declining to authorize loans where such private transfer fees are required, FHA mortgage insurance will no longer be available.

HUD representatives said further: “The rule has been in effect since 1994 with limited or no compliance with the requirements therein. Mortgagees should be aware of FHA requirements, including this rule – required per FHA policy guidelines - and the loan transactions should not be scheduled for escrow.”  Moreover, “Sellers should not keep buyer deposits on FHA transactions where the reason for the loan denial is not based on borrower ineligibility of these fees upon conveyance.” 

FHA will not likely publish any official notice of this change.  There are condominium projects still showing as approved on the HUD website. However, as condominium project approvals expire, FHA could deny their application for re-certification.

If you have questions about this change of government regulation enforcement or if you want to express your own opinion, please contact:

Esther Yamashiro
Mortgage Credit Branch Chief
U.S. Department of Housing and Urban Development
Santa Ana Homeownership Center
34 Civic Center Plaza, 7th Floor
Santa Ana, CA 92701
714-796-1200 ext. 3465
Esther.M.Yamashiro@hud.gov