There was an excellent piece in the Baltimore Sun today that discusses some new mortgage regulations that are going to result in a drastic tightening of lending standards in the condo market.
Condominiums tend to get hit the hardest when a housing bubble bursts. They tend to lose more value and start falling in price earlier then houses. IMO because they get hit first, you can use the condo market as a great early indicator as to what will eventually happen in housing as a whole later in the cycle.
I wanted to share a few pieces from the Sun on how the standards are changing:
"If you own or plan to buy a condominium, an ominous new phase of the mortgage credit squeeze could be looming on your horizon.
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."
The lenders are going to run away from condo lending as fast as they can. First of all, who wants to do a loan where you have to do hours of research and also forces you to make absolute judgements on things that are not absolute?
Very few lenders are going to want to stick their neck out and lend when they are forced to make calls on the financial viability of a condo project when prices are in an absolute free fall.
If they do lend the money expect its going to be at ridiculous interest rates and require large amounts of money down.
Here are the reactions of two mortgage presidents to the news from the Sun:
"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."
This is going to put the condo market into a free fall IMO. You might not even be able to get a condo loan going forward. If you have a condo for sale thats not moving I would advise you to be realistic with your pricing and get out now before all of this starts to get implemented. Lending availability for condominiums is going to virtually disappear due to these changes.
Expect the reaction to this news to be even more violent if you live in a bubble area because these loans going forward are going to be an even riskier bet for the lender.
Stay away from condos!!!