If you own or plan to buy a condominium, an ominous new phase of the mortgage credit squeeze could be looming on your horizon.
As a result of underwriting changes by giant investors Fannie Mae and Freddie Mac, plus severe new restrictions by private mortgage insurers, getting a loan on a condo unit -- or even refinancing one you already own -- could prove tougher than you imagined.
For example, starting May 1, AIG United Guaranty, a major private mortgage insurer, no longer will write coverage on condominiums in hundreds of ZIP codes across the country that it designates as having "declining" market conditions. The ban is irrespective of applicants' credit scores, assets or equity stakes. Even in the healthiest real estate markets, United Guaranty will require buyers to put at least a 10 percent down payment into the deal, and will reject applications on units in condo projects where more than 30 percent of the owners are investors.
Buyers with 20 percent or larger down payments are not affected by the private mortgage insurance cutbacks.
Fannie Mae, a dominant financing source for condominium projects, has rolled out new procedures that some lenders and mortgage brokers say could tighten up the availability of loans to condo purchasers in the coming months. Freddie Mac has issued similar new guidelines.
Under Fannie Mae's changes, most of the due-diligence research on condominium projects' key characteristics -- their legal documentation, the adequacy of condo association operating budgets, percentage of unit owners who are late on association-fee payments, percentage of space allocated to commercial use, and percentage of units owned by investors -- must now be performed up front by loan officers.
Not only is this time-consuming and costly, but under the new procedures, Fannie Mae expects the lender to warrant the accuracy of its research. Some condo-project legal documents run into hundreds of pages, yet lenders are supposed to take legal and financial responsibility for their accuracy.
"It's ridiculous," said Phil Sutcliffe, principal of Project Support Services of Lansdale, Pa., who helps put together condominium project financing for developers. Not only does this shift huge paperwork and time burdens onto lenders and brokers, but it also forces them to make "absolute judgments on things that are not absolute."
For instance, said Sutcliffe, the new Fannie guidance requires loan officers to make certain that at least 10 percent of a condominium project's operating budget is reserved for "capital expenditures and deferred maintenance." Sutcliffe, who has analyzed condo project budgets for two decades, says there are no wiggle-room provisions in the guidance for "compensating factors," such as when part of the line-item reserves are for important but nonphysical expenditures like insurance.
If the "reserves" item is below 10 percent, some loan officers might simply reject the whole building and refuse to take loan applications on individual condo units, according to Sutcliffe.
Fannie Mae spokeswoman Marilyn Kornfeld said the new procedures are designed to "protect borrowers and manage increased credit risk in the market." Freddie Mac spokesman Brad German acknowledged that the changes would make condo-unit loans "more labor and paper intensive for the lender," but said weak sales, growing numbers of financially troubled projects and declining property values made them necessary.
Jeff Lipes, president of Connecticut-based Family Choice Mortgage Corp., said the Fannie Mae changes, combined with other retrenchments battering the condo market, mean that when potential applicants inquire about getting a loan on a condo unit, "we really can't give them a definite answer" because it takes research to determine whether their building qualifies.
"Even if you had an 800 FICO score and 50 percent equity," said Lipes, "you still might not be able to get a condo loan." It depends on whether the underlying project can pass the underwriting tests, is in a declining market, and has a lender "concentration" limit on it. Some lenders refuse to finance more than a set percentage of units in a single condo project to limit their risk.
Bruce A. Calabrese, president of Equitable Mortgage Corp. in Columbus, Ohio, said "Everybody is really backing off condos" because of all the restrictions and changes. He said he owns two condo units -- one in Florida, another in Myrtle Beach, S.C. -- and even though he is in the mortgage industry, "I don't think I could refinance either of them right now if I tried."