In January, I posted an article on this site about FHA's new guidelines which are being phased in on condo projects. In short, FHA is making condo financing more expensive and less available by adding new regulations limiting the number of units it finances, avoiding projects with high concentrations of renters and by assessing the overall financial health of HOAs before making a loan.
Now, Fannie Mae is weighing in with its own set of new, restrictive guidelines. The changes, which began to take effect in January, were part of an effort to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.
Here is a brief overview of the Fannie Mae condo guideline changes:
• 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 small 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 being 15% of the total fee payments to 15% of total units.
• Fidelity insurance will be 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 owners policy, known as an 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.
• No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
• No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
• 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 take effect in April.
Watching Fannie, Freddie and FHA gang up on condo lending has been hard to take. Because of the massive failures of high rise projects in San Diego, Las Vegas, Miami and other speculative hotbeds, condo owners in middle America are paying a steep price.
But although it's not fair, it's here. My hope is that over the next few years, some of these restrictions might be loosened or rolled back, because as it stands, the government is actively chasing buyers away from the condo market. There needs to be some geographic consideration in this equation, but instead, Fannie, Freddie and FHA are throwing cold water on condos everywhere.