The Condo Owner's Dilemma

At one of them, a luxury building near the Walter E. Washington Convention Center, the condo board has said it could evict unapproved renters, said Gozen, a mortgage loan officer. "My idea was not to be a landlord. My idea was to flip them, but here I am. I am stuck with them," he said.

Gozen is applying for hardship exemptions from both condo boards, arguing that without a renter he will not be able to keep the properties and will be forced into foreclosure or will have to sell at a particularly low price -- either of which would drag down values for the entire building.

"I can only afford to pay their mortgages for a few months, and then I will have to go to foreclosure," he said. "If they would ease up on this until the market gets better, that would be great."

Many condo associations have tended to turn a blind eye to the rental restrictions or simply lacked the capability to keep track of when units were being rented out, real estate lawyers said. But now they are now tightening oversight as mortgage lenders and insurers take a closer look at loan applications.

For example, starting this month, AIG United Guaranty will no longer insure mortgages in condo projects in what it defines as "declining markets." In other places, the major private mortgage insurer requires that no more than 30 percent of the units within the association be occupied by renters, down from 40 to 50 percent.

It will probably also become more difficult to finance the purchase of a condo with a high number of rentals using loans backed by Fannie Mae and Freddie Mac, the federally chartered mortgage-finance companies. The companies are taking a more detailed look at loan applications, said Eric D. Gates, a mortgage broker at Apex Home Loans in Bethesda.

Lenders and insurers contend that buildings with a high concentration of renters can be more difficult to sell and have more trouble maintaining their value, Gates said. "I think they [lenders] also get concerned about the finances of the condo association. Investment properties have higher rates of default than owner-occupied properties," he said.

Condo associations have reacted to the more intense scrutiny by tightening oversight of their rental policies. To discourage rentals, some condos are now charging owners to have a tenant in their unit -- $100 a month in one community, said Robert J. Segan, a lawyer with Segan, Mason & Mason in Annandale.

"In the last year, more condos have wanted to put rental restrictions in place," he said. "I am hearing it more and more."

Yet the Federal Housing Administration sees room to loosen restrictions. The FHA proposes lowering its requirement that 51 percent of a condo building be owner-occupied to 33 percent, part of an overhaul and streamlining of its operation that is pending before Congress. Currently about 2 percent of FHA loans are made for condos, and it can take three months for agency approval because of overlapping requirements, said Meg Burns, director of FHA single-family program development.

"We think that particularly in urban markets, that it's fairly common for large buildings to have lots of rentals," Burns said. "We feel like first-time home buyers should have access to prime rate financing for those buildings."

Real estate lawyer Pia Trigiani has advised condo communities to loosen their rental restrictions and try to address the behavior they fear from renters by requiring a longer lease -- at least a year and sometimes two -- as well as by requiring the tenant to abide by all of the association's rules and regulations.

"The sense is that if you are an owner, you are going to be a better neighbor, you are going to take better care of building," said Trigiani. "I don't know if that has ever been proven. A long-term tenant is as good as an owner."