Condo Credit Squeeze

The Baltimore Sun is writing Condo-loan restrictions tightening.

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 is irrespective of 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 condo projects where more than 30 percent of the owners are investors.

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.

"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."

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.

New Lending Rules

• No declining markets
• 70% owner occupied
• 10% minimum down payment
• Adequacy of association budgets
• Requirements on commercial space

Looks like it's "No Deal" on condos.

Email From Mortgage Broker

Tonight I received the following from "SEB" who writes:

Our residential department, had a buyer for a condo, seeking 80% financing, full doc, no paper taken back, cash down, our lender will not finance the project because Freddie or FNMA would not purchase the loan unless the condo project was 90% sold and the developer could not have taken back paper, net result, no sale, a lot of residential lenders we are dealing with will not make the loan if the market area where the property is located has declining values. A real credit crunch!

It is going to be extremely difficult if not impossible to get financing to buy a condo. Indeed it becomes a veritable "Catch 22" in regards to sales where any building is less than 70% owner occupied. Perhaps some foreclosure sales or short sales go through where the bank is willing to hold the paper. However, who in their right mind would want to buy into such a building knowing they could not sell down the road?

And what about all those condo towers still going up? I sense a lot of bank owned condo towers as soon as construction is complete. Banks that financed condo towers are going to own them because the developers will be unable to get 70% owner occupied units even without the declining market restrictions.

It should not be long now before we start seeing some regional banks fail over this.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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