Fannie Mae tightens down on condo lending

In the wake of plummeting real estate values and mortgage delinquencies, Fannie Mae responds by tightening guidelines.  Announcement 08-34 consists of modifications and additions to existing guidelines.  If you plan to buy a condo after March 1, 2009 read further to see how this affects you.

Almost all new changes to the FNMA guidelines present more stringent requirements making it harder to obtain lender approval.  So if you plan to buy a new condo or condo conversion you need to know how this affects your financing approval. Some big highlights:

• 3 new restrictions – first, projects with excessive sales/financing structures are ineligible to get a new loan.  This can include sellers paying abatements for HOA dues, mortgage interest payments, and builder/developer contributions – any payments that can help and often entice buyers to get into the property only to find out later they cannot afford it.  Second, projects with excessive non-residential space (more than 20% percent) – space devoted to non-living areas – are ineligible.  Third, projects where a single entity owns more than 10% of project are ineligible.

• 15% HOA dues delinquency maximum -  at any point in time, 15% of all association dues cannot be more than 30 days past due.  Studies show HOA delinquencies adversely affects the value of the property, quality of living, and potentially encumbers the property.

• Requires additional hazard insurance or “walls-in coverage” – The Master Policy (which all condo projects should have) generally covers community property of the condominium such as: hallways, shared courtyards, building structure, etc (you may want to look through the Master Policy to verify).  However, personal property, “improvements and betterments,” and property within the walls (such as hardwood floors, cabinets, etc) of the condo, hazard insurance is needed and is now required. This condo insurance is also referred to as an HO6 policy.

• 70% minimum presale -   previously only 51% of the project needed to be conveyed or under a legal  contract.  Now in order to get FNMA approval 70% of the project needs to be presold to meet guidelines.  This can represent a huge barrier for builders who want to sell and buyers who want to buy.

• Fidelity insurance required – condominium projects with 20 or more units require fidelity insurance.  This protects the funds of HOA collected in advance for repairs, maintenances, reserves, and on going expenses against embezzlement or fraud.

• Project eligibility review serve (PERS) – perhaps the only less restrictive change to the guideline.  This  allows lenders an additional avenue to submit condo projects to Fannie Mae for eligibility review.

In spite of huge underwriting and portfolio losses from Fannie Mae, these more restrictive requirements seem a natural consequence.  Although, in the short term financing will be harder to obtain, this can help long term stability for the mortgage market.