Catch-22 Impact of New Fannie Mae Condominium Regulations
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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Most of these requirements are things that any responsible home buyer should be looking for, anyway. Even in a 2- or 3-unit condo association, the association needs to have enough money to cover insurance deductibles. Sure, in practice, many small condo associations just rely on a pay-as-you-go system, but if you're hit with a $5k deductible and your neighbor can't pay, who do you think gets stuck with the bill?
The fiscal solvency of the condo association is also important. If more than 15% of the units are delinquent on their fees, the fees will start going up, and more people will become delinquent, which just continues the vicious cycle.
The 70% sales requirement is tough, but it makes sense. When people were buying condos, once a development reached 50% sold, that was a very good indication the sales would continue, but that's just not the case any more. With today's stagnant market, there's a good chance that the number of units sold today will be roughly the number of units sold a year from now. And fewer units sold spells financial trouble for the developer who owns the remaining units. The developer won't be able to maintain its share of the condo fees, which leads to the same vicious cycle as above.
The idea that only small banks can issue non-fannie loans is pretty misleading. Nearly all banks will issue some flavor of non-fannie/freddie loan, whether subprime, alt-a, low down payment, or jumbo. Fannie loans are cheaper, but with good reason: they're only issued to relatively low-risk properties. The fact is, if you're buying a property that doesn't meet fannie requirements, you're taking a risk. That doesn't necessarily make it a bad deal, in fact, there's a good chance you'll be able to get a lower price on a non-fannie property BECAUSE it's risky, but you ARE exposing yourself to more of a risk if you buy these properties, which means you ARE exposing your lender to more of a risk of default. You'll still be able to find a mortgage, it's just that it will be at a higher rate.
And if it turns out that, for some reason, the property is fannie-compliant in a year (you've still got enough equity in the place, sales have passed 70%, most people are current on their condo fees), you can refinance later. Just be aware that if it's not conforming now, that's a good indication that there may be other financial land mines waiting for you later.
I was a president of 200+ unit condo association in Chicago (before I moved here). All I can say is, I am glad I sold when I sold, I pity the lady who took my position, I pity property managers who will have to deal with the mountains of new documentation. I probably have lost many of years of my life dealing with unit owners who chose to take advantage of the association by making their assessment bill last to be paid (at that time, the law did not allow us to kick them out just for overdue assessments).
BUT, I am absolutely in favor of these changes. In short term, it will hurt the market. Long term, it will have great positive impact, since it will keep people who should not buy in the first place away from condos. Not everyone should be an owner. It is like a drivers license - responsibility and a privilege, not a right.
right on,
This is just a small step, but finally the governmnet is making an intellegant move.
Lending standards need to further tighten before a stable housing market can ever form. 20% down should be the standard
I'm under contract for a condo that doesn't meet the 70% pre-sold requirement. I've called a dozen of banks (including small local banks and credit unions), none of them would offer me a loan (1 would only offer ARM). I'm putting 50% down and have excellent credit score. As far as I'm concerned, FNMA should not blindly shut out loans simply by these regulations but also need to be flexible based on the buyer themselves. Most of the large scale new condo development are not going to meet the pre-sold requirement ironically because of the regulation themselves and the housing market is that much slower to recover.
20% being the standard? hmm. IMO this is the biggest problem in the housing market. Salaries have not kept up with the cost of housing in cities like Boston. The government should lower the down payment without a penalty (PMI) to 10%.
This would make mortgages more affordable.
As far as Condos go, those are the biggest ripoffs. Most condos wont be able to keep up with these guidelines cause the cost of maintaining a condo complex has gone sky high; And again with salaries falling and/or stagnant, most of these condo owners usually fall behind do to large increases in condo fees and high assessment fees.
My condo fee alone has jumped from 130 to 400 in 4 years with an additional yearly assessment average of 1500.
I know of other condo complexes with the same type of increases and fees.
a quick clarification about the Fannie guidelines that were put in place several months ago to be followed by Freddie in July. On new projects, this includes conversions, construction etc, if the automated system (CPM) is used by the lender, the 51% presale still remains. The lender must be a seller/servicer to have access to this. The new guideline is a move to get away from manual project reviews and make this better. The easiset way to get lenders to use CPM is to change the manual review guidelines. The question needs to be asked, who is a seller/servicer ?
If a manual review is needed, there are still exceptions being made by Fannie on a case by case basis.
There is still a process to get project approval up front and both Fannie/Freddie have NO owner occupancy requirements when the loan being reviewed is for an owner/occupant.
Lastly, there are one or two large banks that do not follow Fannie/Freddie guidelines when it comes to adjustments to interest rates for condos, multi families and investment properties. That is a closely guarded secret in the world of mortgage originators.
For the person putting 50% down, lenders should be fighting over you, I know I would.
Sounds like a typical federal government program trying to solve one problem and creating several others! We already have state laws that regulate condo's that deal with insurance,reserves.and the like. Consumers that buy a condo need to educate them selves about the way a condo association runs and how it is governed and then read the by-laws. Regarding the banking side of the equation it seems to me it isn't much different from buying a single family home or perhaps more like a multi-family house. All real estate transactions have a certain amount of risk involved as recently exposed. The banking industry needs to clean up their act and go back to the days when the did their jobs and get away from the fancy scheme's that brought the industry to their knees and ultimately the financial system. It doesn't seem to me that more or new regulations will solve the problem when regulations that existed did little to avoid the recent melt down?
Is there a minimum unit count for applicable projects? Boston has plenty of small condo associations.
For example, would these regulations apply to a 3 unit association in a typical South End brownstone? The 70% pre-sale threshold applied against 3 units suggests you would need to pre-sell all 3 units.
it'll hurt now, but they generally sound like good ideas. Most condos are in poor financial shape and mismanaged. This will help fix it, but will be really painful for those who currently own condos, since it pretty much works out to more cash out of their pockets and fewer buyers for their units.
Condo Fees and Assessments always seem unfair until you realize the same % of expenses go into owning a home out right with respect to sweat equity (would be paid by assoc dues for the labor/contractor) and cash out for all the carrying expenses. Condo Assos.s do not allow for you to delay or not pay those bills, repairs and other responsibilities.Unfortunately in a condo Assoc it is a tax within a mini society of common living units and when others default on the dues it carries over to the rest of the units holders. The value of the condo unit living is the price to own is lower but that normally means less affluent owners.
for curious, #8
small projects have even more issues as FHA wont look at projects less than 4 (sometimes 5) so those projects are looking at Fannie/Freddie or a banks portfolio.
Fannie/Freddie have no minimum unit requirement or any waiver for smaller projects. Again the 70% threshold only applies for newly converted/constructed projects that are doing a full manual review of the project. If the automated system is utilized, (CPM) the presale is still 51%.
I am in this situation so here is how I see it playing out. My condo is new. We have 200 units, about 40 sold. I think most of the 40 used the sponsor bank. But his bank only offers a 5/1 ARM with a 5.5% fixed for 5 years then 2.75% ABOVE LIBOR! So i either take his bank and hope i sell it or whatever in 5 years, or my rates can be 10%! So now, since many other owners already took this option, imagine in 5 years (RE Tax will go up, Common CHarges go up, and now your mortgage doubles!). So how is this stupid rule helping to solve a mortgage crisis?????? If anything, it will created a bigger problem. People are forced to take shady loans, like the ones I am being offered. And then in 5 years, their mortgage will skyrocket. How is this EQUAL OPPORTUNITY LENDING"?????
I am putting down $125,000, and i have a credit score of 720........This is a travesty.
Is any
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