March 12, 2009

Fannie Mae Takes a Wrecking Ball to the Condo Market

What do you think Fannie Mae has against the condominium and co-op markets? It looks and feels like one big vendetta but obviously Fannie has no heart which, I think, is necessary in order to want revenge. Perhaps they want to rid the country once and for all of apartments in the sky attached to a mortgage. That’s got to be it. What’s your paranoid theory?

Pick one, any theory, but Fannie is doing it’s dead level best to turn the condominium market into a trash heap and ruin condo and co-op owners and render developers as good as toast. The developers, buyers and lenders didn’t see Fannie's new requirements and underwriting guidelines coming when they signed up. The reaction is like a deer in the headlights. And it’s just poor sportsmanship.

This seems so far off the radar and news screen, except to industry insiders, that many of you may not have a clue what I’m talking about, so let’s delve into Fannie’s “dirty little secrets.” Too dramatic? Not for condo developers and owners.

Let’s get down to the players taking the biggest hit with Fannie's
new restrictions – condominiums and co-ops.

Note: When referring to “condos” I am including both condominiums and co-ops. Please excuse my lazy habit.

Premise: The retail mortgage business relies on the secondary market to buy the loans they originate. If there is no secondary market, the retail lender has less incentive to make the loan since they then have to hold the loan in their portfolio. Hence the importance of Fannie Mae and Freddie Mac who purchase those conforming loans written under their guidelines. That, in a nutshell is why jumbo loans are harder to come by and more expensive - there is no secondary market for them right now.

For additional background information on Fannie’s overall guideline revisions see the Real Concepts' post, Fannie Piles on Fees to Mitigate Mortgage Risks.

Effective March 1, 2009, Fannie Mae implemented condo guideline changes “in light of the current condo market and the need to mitigate risk on condo loans”. These changes will affect a buyer’s ability, and cost thereof, to obtain conventional condo loans for many new and established condos.

Fannie Mae now requires a .75% add on fee and an additional 1.75% for investors for conforming condo loans unless the buyer makes a down payment of at least 30 percent. And the buyer has to have perfect credit. Multiple dwelling buyers (duplex, triplex, etc) will be will be charged a flat 1% add-on from Fannie, even if they’ve got FICO scores above 800 and make 50% down payments.

Overview of the new Fannie Mae condo guideline changes and additions:

• For new construction and newly converted condo developments, 70% of the units must be pre-sold (closed or under contract). This is being increased from 51%.

• No more than 15% of a condo project units can be more than 30 days delinquent on HOA dues. This is an existing guideline that is now being applied to new condo projects. The calculation was also changed from being 15% of HOA fee payments to 15% of total units.

• Fidelity insurance will be required for condos 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 condos.

• A requirement that borrowers must now obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, 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.

• No more than 20% of a project can consist of non-residential space.

• The homeowners association must have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

Buried further in Fannie's Selling Guidelines of 12/08 was a further stipulation that renders a condominium project ineligible for Fannie Mae delivery:

"New projects where the seller is offering sale/financing structures in excess of Fannie Mae’s eligibility policies for individual mortgage loans. These excessive structures include, but shall not be limited to, builder/developer contributions, sales concessions, HOA or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1 Settlement Statement."

Also in the Selling Guidelines are the procedures for Fannie Mae project approvals.

Here are the causes of the condominium heartburn:

1. 70% of a condominium project must be sold or under contract before Fannie will approve the project. In this market that is going to prove very difficult, particularly in cases where a block of condo units may have been rented by the developer. If the developer has rented 35% of his condo units, he will not be able to meet these requirements until the at least 5 percent of the leases expire and those units are sold.

Another scenario: Take a two hundred unit highrise that was financed and built without presale requirements. The building is nearing completion and with fall out from presales only has 40 contracts still hanging in. The developer wants to close the forty contracts as soon as Certificates of Occupancy can be issued. With the new Fannie guidelines, another 100 units will have to be sold before Fannie will accept the project. How long will it take to sell that many additional units in a terrible market. One year? Two years? Three years?

As the developer works toward additional sales the forty presale contracts start falling out because they cannot take occupancy. If lenders will not close loans in the building until the Fannie Mae 70 percent sold guidelines are met (and they know there is a way to sell the loans) the problem continues to repeat itself in a vicious circle.

2. Next problem … Projects can not contain more than 20% non-residential space. I find this particularly onerous. All smart growth advocates and proponents of building and living green have encouraged the mixed use, "live, work and play" concept. Local governments have encouraged the lifestyle as a way to cut the carbon footprint and relieve road congestion.

Any highrise building that contains an office building, retail, and/or hotel on the lower floors (that comes to more than 20% of space) is now ineligible for Fannie Mae’s approval. Probably half of the new highrise buildings in large urban centers have the mixed-use configuration that violates these new guidelines. As if these developers did not have enough to worry about. Huge, huge, huge problem.

Could Fannie possibly know the repercussions this will have to the overall housing market? The players in the business agree that this has to be changed but can it be accomplished in time to save the developers?

3. No more than 10% of a condo project’s units can be owned by one entity. If a developer has been driven to seek distressed asset buyers for a portion of the units, this new guideline could hurt the balance of the unit sales by rendering the project as ineligible.

The nature of highrise condos brings an inordinate amount of units on the market at once (unless presold) and the investor has always been an important part of the developer’s sell-out at lower early prices. The investors then re-release the units for sale as the market dictates.

Yes the and speculators, have made a mess of things during the height of the bubble, but by not grandfathering existing buildings, this could have dire consequences for the developer or individual owners of existing condos who want to resale their units.

4. The following explanation of ineligibility is not entirely clear: “where the seller is offering sale/financing structures in excess of Fannie Mae’s eligibility policies for individual mortgage loans. These excessive structures include, but shall not be limited to, builder/developer contributions, sales concessions, HOA or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1 Settlement Statement." But I think it means the developer cannot give away the kitchen sink in order to sell a unit. Does this render a building ineligible or just the individual loan?

5. The rest of the guidelines – no more than 15% HOA delinquencies, insurance requirements, reserves – are good sound underwriting guidelines.

I hate to see condominium developers thrown under the bus. Their exuberance may be their downfall but they don’t need the government to dig the grave and push them in. They’re doing fine all by themselves.

I've written many times about the nature of the highrise condo market where every building is several years in the making and can not react on a dime. Once embarked on a highrise, there's no turning back. There may be an an overbuilt condo market now in many cities, but when these projects were started they were probably market appropriate.

Take this example that I wrote about in an earlier post about the Atlanta condo market. At the end of 2005 there were 4,455 new condo units finished or under construction which, at the time represented a one year supply. Since it takes years to bring a condo tower to completion, this signified anything but an over supplied market. But by the end of 2008, Atlanta was sitting on 5,100 new condo units, which based on the 2008 sales pace, was an eight year supply.

It is totally unreasonable for our government (Fannie in Conservatorship) to change the rules - in mid stream - so dramatically as to devastate a huge portion of the country's housing market. By Fannie declaring condo loans a high risk they are fulfilling their own prophesy.

Many politicians and economists have proclaimed that we can not regain our economic strength without fixing the housing market. Fannie in one fell swoop is ruining a huge part of that market. With all the government is doing to stem foreclosures, to fix the economy, repair the banks and bring back growth, I don’t understand why they have set down such a damaging policy to a very large, and very important part of the housing industry.

All indicators point to a more urban, higher density lifestyle in the future for a myriad of very good reasons. If you believe that home ownership is good for the economy, then somebody needs to convince the government that condos and co-ops are an important part of the housing market.

Time to get on board Fannie.


Anonymous said...

Great points. I can't finance my unit and I have 20% down plus fico of 750.

Anonymous said...

These guidelines are devastating. It just happened to me. I can't get financing for my condo. I got several offers on my condo (Bucktown in Chicago) and I accepted the most qualified buyer (he was putting 25% down ($70K)). He has applied twice for financing, the first time was with Bank of America and the second time was with Wells Fargo. He just found out yesterday that he can't get financing on my building because there is a commercial space in the building that is more than 20% of the building. The building is in excellent condition, 100% owner occupied, completely maintained, fully insured, professionally managed, clear title, no issues whatsoever. And the reason he gets denied is always the same reason, because the bldg. has a commercial unit in it. How can Fannie/Freddie put blanket guidelines on all condo buildings? My buyer even contacted a broker that said he could get Wells Fargo to grant an exception in this case but they denied it too, using the same reason (commercial unit in bldg). It doesn't really makes sense to me because there are thousands of condos like this in Chicago. What are we suppose to do? Walk away from it and cause another foreclosure? I'm in shock.

Gerry Davidson said...

This entire condo debacle is devastating! I feel your pain. An entire segment of housing, yes condos are housing, has been rendered unsalable. It's outrageous. Even many jumbo lenders are saying condo buildings have to follow Fannie guidelines to get financing even though they are nonconforming.

I shutter to think how long it will take to rectify this. Unfortunately, it doesn't seem to be getting enough press coverage yet to make a difference. After the fact, I'm really shocked that these guidelines made the grade with practically no opposition. Nothing from the National Association of Realtors or the National Association of Home Builders.

I'm in the condo saturated city of Atlanta. We have thousands of unsold condo units, many of which have been rendered toast by Fannie Mae. Send your story to anybody who'll listen.

Anonymous said...

We have the same problem regarding the 20% commercial. Any solutions out there?

Anonymous said...

I am also getting hit with this situation while trying to buy a new condo. Over 25% down, FICO over 800. Property is 76% sold, 3 years old (perfect condition), zero commercial property, fully insured, professionally managed, clear title. Issue is that 2008-2009 budget lists reserves at 5% of income. Despite actual reserves in excess of 10%, Bank of America is declining to finance. It drives me mad that even though the money is there, I'm being shot down because of a budget line item written before these rules even existed!! Pulling an appraisal and title now in order to request an FNMA waiver, but all this extra review is going to push me out past my lock date. I'll let you know if I get the waiver.

Anonymous said...

I recently learned of this after getting declined from a bank to refinance my condo. The reason they are denying is that the original developer bought 20% of the units in 1985 and still owns them, which means no one can sell their units ever unless he divests 10% of his units? but how can he do that if no one will qualify to buy now. we are stuck in a catch 22 by the genius's in washington who caused this mess in the first place!!

Anonymous said...

I just found out yesterday that the bank refused to finance my condo and I have %25 down, because the Fidelity insurance, any opinion on that the condo are built in 1985 not a new project.

Gerry Davidson said...

Are you are saying that your loan request for a condo was denied because of lack of fidenlity insurance protecting the Association's funds? If no such insurance existed for your Condominium Association that could be grounds for disqualification for a loan under Fannie Mae guidelines. In such a case it does not matter whether the condominiums are new or existing. In my opinion the fidelity insurance on Association funds is a valid requirement and safeguard against misappropriation or fraud.

Anonymous said...

Gary, our condo association is planning to lobby our US Rep. and Senator on this because we agree with you that it is very bad policy. But we'd like to contact others with whom we could make common cause. Could you aid us on this perhaps with a post inviting interested parties to contact us? If so, I'd be glad to provide an appropriate e-mail address.

Gerry Davidson said...

Great idea to lobby your representatives. This is going to take quite a lot of work to accomplish change. You might also go to Twitter to raise awareness and support. There are many out there are effected. Good luck.

jerry von buskirk said...

I am outraged! We were just denied a refinance loan on our vacation condo in Palm Desert, CA., because of the new Fannie Mae
guidelines. Both I and my wife's credit scores are above 750 and our loan to value ratio was going to be less then 40%. We were trying to lower our monthly mortgage payment by reducing our loan amount with $72,000 in cash. We were denied our loan because the word "resort" appears in the name of our development. All 960 units in the complex are privately owned and titled individually! Apparently, the new guidelines state that "projects allowing short-term and seasonal rental periods of less than one month" no longer qualify for mortgage financing / refinancing. That will effectively eliminate about 90% of all developments in the Palm Springs area (as many owners rent to "snowbirds" during the winter months! I would like to be added to a list of any effort to get these absurd new Fannie Mae restrictions recinded.

Anonymous said...

Purchased a condo foreclosure from HUD. Established complex of 96% occupancy. Denied financing- Not Fannie Mae approved do to the fact the condo assoc has more than 15% HOAF late.
I read some where if buying a HUD forclosure it may be exempt from approval.. Can anyone shed any light on this?

Gerry Davidson said...

The only thing I found about HUD exemptions regarding foreclosed properties had to do with instances of investors buying foreclosures and then "flipping" them within 90 days of acquisition. You can check out that waiver at this HUD site:

I did not find any information on exemptions for other situations, but that does not mean they don't exist.

Anonymous said...

I've just been introduced to this atrocity this week when I tried to refi my condo. The developer's management wing retained more than 10% of the units in my condo building to use as rentals, and now we're all stuck. No one can sell, no one can refi. This is one of the most atrocious examples of government interference with contract and property rights. I'm an attorney and am seriously examining potential causes of action against Fannie relating to deprivation of property, due process, etc.

Anonymous said...

As usual, some short-sighted bureaucrat in DC who has no experience in the condo or real estate market thought up these guidelines. Why doesn't FNMA hire some folks with real-life experience in real estate sales and condo management?? This situation will just set the market up for another bubble when the pent-up demand for the product becomes too strong. This is a huge
detriment to the redevelopment of our cities. Where do they think people live in the city - not in little neat rows of single family homes. The problem with the market was not condominiums - when built, sold, financed and managed responsibly. The problem was the greedy lenders and their packaging "experts" on Wall Street.
The fact that the Congress hesitates one second in reform for the financial sector tells us all who is really running the show here!

joyce said...

How about a class action lawsuit against FNMA by all condo owners for the value of all of our properties???

Oboewan said...

What happened on my with FNMA made me almost puke. Here I am, paying for THIER economic recovery with my tax dollars (and YOURS) only to have them pull the plug on the buyer I had lined up for my Co-Op unit sale here in VA. At the last moment at settlement, PNC bank was told by the underwriter that they wouldn't be able to finance the buyer because my Co-Op (around since '84) had been listed by FNMA as an "unapproved project". I've been living in my new home for 3 months now and was counting on this sale to go through. Now I've lost my buyer, had to pay 2 months extra mortgage/Co-Op fees and there are no lenders for any interested buyers to use and my property is worth bupkis! As far as any legal options, all the folks I've talked to agree there really aren't any. None of the agents or lenders I've spoken with have EVER encountered my particular situation and I'm at a total loss on options at this point.

Anonymous said...

obewan, what a nightmare, two mortgages?!
Nothing to be done fast for Fannie Mae. In interim as a stop gap to help you out financially
Try to rent, check (read) out the bylaws for your Association, see if there is anything in bylaws that speaks of rentals.
Many Boards throw around the "ByLaw" excuse and hope you will not challenge

Anonymous said...

I had a condo sale to an excellent buyer (800 credit score, 50% down) fall through because the bank turned her loan down on the grounds that my condo was "not Fannie Mae warrantable". The condo questionnaire revealed we have two entities that own more than 10% which prompted the banks response. The two entities are both non-profit groups (one is county & state government run and rents their units via HUD programs to low income families). The second entity is a faith based non-profit that has the same mission. Both are original owners since 1988 and have never missed an assessment. Our condo project meets all other criteria. The bank issued its denial immediately upon receivng the condo questionnaire and did not even attempt to use PERS to obtain a waiver. Turns out the bank was not a FNMA approved lender. I went to a different bank and we were granted a waiver a month later but my buyer had already moved on and purchased another property.
Two issues need changes. FNMA (and HUD for that matter) must change the word "investor" or clearly define it. My situation exposed their lack of foresight when the word "investor" was chosen. My two entities are clearly not "investors" but are being treated as such.
Banks need to educate themsleves and act more responsibly. If they don't have the personnel or desire to see to it that a borrower and seller are treated fairly and honestly they should face some sort of punishment.

Anonymous said...

I am seeking to understand why financing is no longer available on units in our new condominium development. The articles refer to a change from 51% to 70% on new projects. What is date when the 51% requirement was imposed? I understand that FNMA guarantees were easy to obtain in October, 2007.

Any help would be greatly appreciated.

Anonymous said...

Dear Gerry, thank you so much for posting this article. I am a condo owner in Washington State that is stuck in the catch-22 as well. Developer went chapter 13 and rented out 60% of the vacant condos. He controls the HOA and none of us can refinance or sell our condos! I've been unemployed for 14 months and am going into foreclosure to get out from under this hell.

Question: What will the lender (Wells Fargo) do with the property if they cannot sell it as well? Will I be able to negotiate to rent it back from them?

Anonymous said...

I am in the same boat as others - I have a well-qualified buyer for my condo in Des Moines, Iowa but conventional 80% LTV financing is not available because there are ZERO DOLLARS in reserves, greater than 15% delinquency in HOA dues and NO fidelity insurance. I have posed the question as to whether this creates a breach of fiduciary responsibility on the part of the HOA. I asked the question yesterday of a RE attorney who advised me that "yes" it does constitute a breach of the fiduciary responsibility and the recourse would be to file a (legal) complaint seeking relief from the HOA to either buy the condo from me or reimburse me for the devaluation of the property. My next thought is that since there are other units for sale and I presume they are encountering the same scenario then perhaps a class-action suit would be in order. However, what is the real value in obtaining a judgment against an HOA with no money? Any thoughts?