Gathering much attention in recent news are the adjustments made in the requirements and the methods of Fannie Mae’s underwriting guidelines.
One of the conditions of the new FNMA underwriting guidelines is the fact that credit is restricted to condominium projects with a 15 percent delinquency rate. This tightens the belt for buyers as they will not be given financing through Fannie Mae should at least 15 percent of condo owners in the building become delinquent on their condo or Home Ownership Association fees. In addition, the association must have enough funds on hand to meet the deductible of their insurance policy.
Other conditions include the following: At least 70 percent of new condo units must be presold, at least 10 percent of the operating budget must be set aside for reserves, projects can not contain more than 20 percent non-residential space, and no more than 10 percent of units may be owned by a single entity.
While all of the above stated conditions may add some degree of difficulty for buyers, these guidelines are expected to help stabilize the condo market as it should decrease the risk of buyers defaulting on their loans. Fannie Mae wants to push potential buyers to exercise due diligence in researching not only the condo unit they desire to purchase but also the association which it is governed over. These guidelines were put in place to protect new buyers from purchasing units in buildings that are in dire straits or have been overwhelmed in unpaid maintenance or association fees, but are viewed with much skepticism by some.
However, let us examine two of the aforementioned stipulations:
1. At least 70 percent of new condo units must be presold.To illustrate, take a two hundred unit high-rise condominium that was built and financed without any presale requirements. With the building nearing completion, 40 contracts have been signed. Of course, the developer wants to close on those 40 contracts as soon as the Certificate of Occupancy has been issued. However, under these new Fannie Mae guidelines, another 100 units would have to be sold before they accept the project in order to meet the 70 percent minimum presale requirement. In today's market, this could take many years.
2. Projects can not contain more than 20 percent of non-residential space. Another illustration: Condo/hotel units have become trendy over the past few years, including such projects as
The Avant and the
Hampton Inn at 38 High Rock. Many of these buildings, along with high-rises which contain office buildings or retail space would now be ineligible for Fannie Mae's approval as less than 80 percent of the space is used for actual condo units.
How AffectedCondo owners and buyers are both affected by these new guidelines. These changes will make it more difficult for condo owners to sell or refinance in a declining market. In addition, lenders of smaller firms who do not have the available time or staff to meet these requirements by researching all of this information can find it very difficult to issue new condo loans. Ultimately, these changes could make it unbelievably difficult for condo owners to protect the value of their homes and can thus discourage new condo ownership.
What Can Be Expected Of Buyers?Potential condo buyers can expect a loan officer to carefully inspect the quality of the condo as a whole along with its surrounding area. They will look into association operational budgets, percentage of non-owner occupants, percentage of tenants defaulting on their mortgages along with many other factors before writing a loan. The above stated information is usually supplied in a document called a Condo Certificate Issuance (Condo Cert). The major difference that is seen is the lengths taken to verify the accuracy of all the data and information it contains.
To read the entire Fannie Mae announcement
click here