Changes afoot could stomp on condo market
New guidelines will make it hard or impossible
for many to get loans or even refinance
KENNETH HARNEY
WASHINGTON --
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 doesn't consider 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 projects where more than 30
percent of owners are investors.
Buyers with 20 percent or larger down payments are not
affected by the private mortgage insurance cutbacks. Some mortgage insurers
continue to accept applications on condos in declining markets, but require
down payments of at least 10 percent.
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 condo 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 upfront 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 the hundreds of
pages of text, 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 financings for developers.
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" under certain circumstances.
It all depends on whether the underlying project can
pass the highly restrictive underwriting tests and whether it is in a
declining market. Bruce 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 personally owns two condo units -- one in
Florida, another in Myrtle Beach -- and even though he is in the mortgage
industry, "I don't think I could refinance either of them right now if I
tried."
Kenneth Harney
