Richard D. Vetstein, today, he outlines FNMA requirements for condos:
New, stricter Fannie Mae (FNMA) condominium lending regulations are dragging down condominium sales and project development. The changes were part of the government effort to limit risky lending in a segment of the housing market particularly hard hit by foreclosures. The new guidelines apply to all loans sold on the secondary mortgage market and insured by Fannie Mae or Freddie Mac which amounts to approximately 40% of all mortgages in the U.S.
• For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%. This is the real Catch-22. Fannie Mae won't approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from smaller local banks who hold their own mortgages and are not bound by the FNMA guidelines.
• No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from 15% of the total fee payments to 15% of total units.
• Fidelity insurance required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
• Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium HO-6 policy typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
• The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
• Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.
According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis. Therefore, these guidelines may not apply to all condo projects.
Rona's two cents: FNMA is a Federal program, so its rules are one-size-fits-all. The problems that I see out in the field are with new construction, new conversion, and with the unique-to-us 2 and 3-family homes converted to condos. (Some of those properties have no reserve and no books beyond a checkbook.)
Although these new regulations cause havoc within a particular transaction, I still favor guidelines that force fiscal responsibility in condo management. In the long run, real estate will be on a more sound footing if lenders force owners to run their condos properly.
So, who thinks I am out of line? Who has seen condos run with a wing and a prayer and are happy to see these guidelines in place?
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