House and condo owners are fighting a rise in rentals, via homeowner and condominium associations. Restrictions that some enact could face legal constraints and challenges.

Many lenders and mortgage insurers make condo complexes keep at least half their units occupied by owners, not renters, to meet lending rules. That's getting harder as the foreclosure mess deepens, dragging down values. Rather than try to sell in today's market, many owners consider renting their homes out.

Leasing Pros And Cons

It can prove a great boon for that owner but a bane for nearby ones, who say rentals degrade their communities. Yet if rentals are limited, choking off a nonresident owner's income stream, more homes may fall into foreclosure. That would result in lost homeowner association dues, lower property values and vacancies with all the problems they can bring.

Also, changing rental rules can take a majority vote by association members — even 75%, "nearly impossible" to get, said Richard Thompson, founder of Regenesis, a Portland, Ore.-based consulting firm.

It's a feud with no easy answers.

Condo owner associations are being squeezed by lenders to maintain an owner-occupancy majority. For an investor purchaser to get a Fannie Mae-backed loan, Fannie Mae (FNM) says the complex must be 51% owner occupied or higher.

This rule has been widely misinterpreted to apply to all condo buyers seeking Fannie-backed loans. Confusion may come, in part, from the fact that the Federal Housing Administration does require that all buyers seeking FHA-backed loans for condos must purchase in a complex with 51% or more owner occupancy.

Mortgage insurers can have tighter restrictions. Some will no longer insure properties in "declining" markets. Some reject applications for mortgage insurance in complexes with owner occupancy under 70%.

Many lenders and loan-backers such as Fannie Mae, Freddie Mac (FRE) and the FHA have tight eligibility rules on delinquency of association dues. Fannie Mae says it requires that in attached condo projects, no more than 15% of units may be more than a month delinquent paying condo association fees.

One In Eight Run Late

That may not seem like a lot, but nearly 12% of U.S. households ended 2008 behind on mortgage payments or in foreclosure, according to the Mortgage Bankers Association.

Delinquencies and foreclosures are much higher in hard-hit areas. Plus, most homeowners get behind on homeowner association dues before they get late on mortgages. So meeting Fannie's 15% guideline is a real concern for condo associations