Market Conditions: WSJ: Fannie Mae Tightens Credit for Condos
The Wall Street Journal reports that Fannie Mae has tightened credit for buyers of condominiums. The new rules are going to hit new construction condo buildings especially hard.
Effective as of March 1:
- Has stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have sold (previously it was guaranteeing the loans as long as at least 51% had sold)
- Won’t back loans for sales in buildings where 15% of current owners are deliniquent on HOA fees
- Won’t back loans where more than 10% of units in the building are owned by a single entity
Freddie Mac has apparently not tightened its lending standards- yet.
Both Freddie and Fannie, however, are going to increase fees.
Starting in April, buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan even if the buyer has an outstanding credit score.
“These buildings are just in purgatory. This new requirement is the straw that’s going to break the back of a lot of projects,” said Norman Radow, an Atlanta real-estate investor who works with lenders to rescue distressed condo complexes.
“It’s a weight being tied to a drowning industry.”
Fannie Tightens Its Conditions for Backing Condo Mortgages [Wall Street Journal, Nick Timiraos, Mar 18, 2009][subscription required]
Unless there is language to define a single entity in item 3, won’t it ultimately cancel out item 1? If less than 70% of units are sold, a single entity (the developer) still owns 30%.
Now that is some great stimulus there.. What the hell?
“Unless there is language to define a single entity in item 3, won’t it ultimately cancel out item 1? If less than 70% of units are sold, a single entity (the developer) still owns 30%.”
Gotta read it so that each provision makes sense. The 10% in #3 must only apply to “sold” units. I’m sure it’s to avoid a developer using a straw buyer to get over the 70% threshold *and* because it’s a comp price risk if that owner needs to dump their 10%+.
Soo, the government gives us 8K free money only to turn around and charge higher fees? Ah well. Looks like i’m holding off my purchase until next year when condo prices drop even more.
Until this affects Freddie as well I don’t think this will have much of an impact. Condo developers will just go through Freddie and the FHA (as Vetro did). Until all the backdoors are stopped to easy financing (FHA), Freddie, condo prices won’t adjust drastically.
As an aside, I think the 25% down on a condo to avoid the fee is a bit much (should be 20% IMO). Not sure where I stand on the 70% sold provision. Its just like lenders to act this reactionary and restrictive though after years of laxness.
Maybe if they had consistently required 20% down we wouldn’t be in the situation we’re in and they wouldn’t need to raise the downpayment percentage to 25% to eliminate fees.
“Its just like lenders to act this reactionary and restrictive though after years of laxness.”
Um, I think there’s been a little management shake up at FNMA. Something about a change in ownership?
There is an oversupply of housing out there nationally, and one way or another incentives to add more supply need to be cut. By incrementally taking steps to reduce demand, this will translate out to less supply, at least for a few years.
So I’m in favor of this, even if it drives the prices of my homes down (I’m not moving from the primary or selling the vacation).
At some point, enough of the demand side will have saved 20% down payments to pay whatever market prices become. This helps this happen by almost certainly contributing to a decline in prices, which makes homes more affordable for future buyers.
I’ll be disappointed if they stick to these burdensome restrictions after a semblance of equilibrium is reached. But right now this helps us get to where we need to go.
I think this might be good for pre-con buyers IF they negotiate their contracts with a good financing out.
Essentially, I’m thinking you might be able to draft your contract so you get your deposit back if when it comes time to close your developer hasn’t managed to contract for 70% of the building since you won’t be able to finance.
Sure you’d still lose the time value of your deposit but much better than being forced into closing on a unit that didn’t pan out with sales.
At this point, anyone entering into a new home purchase contract without a financing contingency deserves whatever they get. It could not possibly be more obvious that buyers need to protect themselves from being unable to close and unable to back out.
This is old news. The announcement was made months ago. It’s why I wanted to close on my weekend place in River North in February so I could limit my down payment to 20%. It’s also why I avoided buildings like the Vetro where the developer was still involved, where there were too many empty units; where many units were owned by flippers; and, there was not an operative or responsible HOA.
BTW, I was very happy to find that the dog park we discussed in a previous set of comments was only a block away, right behind the Office Depot.
Actually, these “new” lending standards are less “restrictive and reactionary” than those that prevailed before the late 80s.
Used to be, you had to have 20% down for a condo. The building had to be at leat 80% owner occupied, and 80% of a new development had to be sold.
Fannie Mae got stuck with a lot of bad loans as a result of loosening standards, but they were loosened to drive the market up and spur specious economic “growth” mainly in the form of rapid price appreciation made possible by incredibly lax lending standards.
Once things stabilize and we know what all these units are really worth, Fannie will probably revert to slightly looser standards, like a 10% down standard. But right now, there is so much inventory overhang and bad debt, and prices are falling so rapidly, that it is impossible to properly value many of the units, especially in new developments or recent conversions.
Get the government out of home lending for God sake!! If this it their idea of helping the housing market, we are all in a lot of trouble…
“BTW, I was very happy to find that the dog park we discussed in a previous set of comments was only a block away, right behind the Office Depot.”
Glad to help Steve A! I’m moving in 9 days and I cant wait!
And can’t businesses besides fannie buy these mortgages? If anything, I’d expect fannie to be buying LESS and other companies buying more.
Just let everything crash overnight, christ, lets get it over with. You rip the band-aid off in one quick rip, not as slow as possible. IT HURTS MORE.
Nobody WANTS to buy those mortgages. That’s why Fannie Mae and the other GSAs were established-to buy crap that would otherwise be unsaleable.
I’m totally with Matt- GET THE GOVERNMENT OUT OF THE HOUSING MARKET. There should be no FHA or HUD.
Look at the results of government housing programs since first they were promulgated in the 1930s:
Low-income housing projects- results: mass herding of extremely poor and unsophisticated folk into badly built highrises, breaking up their social and support networks, causing deeper blight and destruction of city neighborhoods.
FHA and VA loans- results: effective redlining of city neighborhoods during 50s and 60s along with the hypergrowth of autocentric suburban sprawl, as these loans at that time were made only for new construction in new auto suburbs. Also, many more bad loans as these loans were for buyers otherwise unqualified.
Section 8 housing vouchers- results: blighting and complete destruction of some of the finest neighborhoods in our major cities. Victim neighborhoods include NYC’s Bronx, St. Louis’ West End, Rogers Park and other Chicago neighborhoods. Enables landlord to make more money from the gov’t in the form of rent vouchers than he’d make maintaining a nice building for market tenants.
GNMA, FNMA, Freddie Mac- drive up housing prices to unaffordability for honest, legitimate middle and moderate income buyers while sponsoring the creation of a Mount Everest of bad debt, by buying loans that otherwise would never be written for there would be no secondary market for them.
Government housing programs have done nothing but create sprawl, blight cities, drive up housing prices to unaffordability, and create the biggest mountain of bad debt in the history of the world, with no benefit to anyone but developers, home builders, and bad landlords. Our poor are just as badly housed as ever, we have more homeless people than ever, while seniors are being blasted out of houses they struggled for 40 years to own honestly, by escalating taxes, and moderate income folk are unable to afford a decent dwelling at prices in line with their incomes.
“Our poor are just as badly housed as ever”
I’d check on the quality of housing for the poor in the pre-WW2 era before I would so confidently state that. At least public housing had indoor plumbing and electricity. And saying it would have inevitably come is nonsense.
This is old stuff.
Banks have been hitting borrower’s for the .75% loan level price adjustment on condo’s for the past two months and it applies to both Fannie and Freddie loans.
These rules are why that RD development can’t close units right now.
You cannot buy a condo in the city of Chicago without 10% down right now unless you can get an FHA loan which is why the market is so dead. Although, one mortgage insurer is not going back to 95% for borrowers with over 700 scores for a limited number of banks. The 10% down is required by the mortgage insurance companies, not the banks. In theory, Fannie/Freddie would still go to 100% financing, but you cannot get mortgage insurance above 90% on condos now so the banks won’t make the loans.
Even if you got the 10% down, the lenders are getting even stricter on evaluating the soundness of the HOA and other rules are tightening. For instance, it used to be 25% of the building could be commercial space, but Fannie rolled it back to 20%. A lot of buyers who bought in four flats with 3 condos above and 1 retail space are getting nasty surprises when they try to refinance that their building no longer qualifies (you can get exceptions to this rule though).
The investor concentration is also of prime importance when evaluating buildings to purchase in as that is screwing up current home owners too. If too many of your neighbors decide to rent, you are screwed. Better make sure there are limits in the condo decs and by laws.
I didn’t know poor people were supposed to have luxo housing…where is that in the constitution?
Have you traveled outside the US? Poor people in the US have it very very good.
“I didn’t know poor people were supposed to have luxo housing…where is that in the constitution?”
Electricity and indoor toilets are luxuries? I supposed that we should also dump TVA? How about getting rid of USDA’s Rural Development Electric Programs or their Rural Development Housing & Community Facilities Programs. No wait, wait it’s electricity and housing for white folks.
The concept of a necessity has been lost in this country. A car is not a necessity. Air conditioning is not a necessity. 2 bathrooms is not a necessity. Granite counters are not a necessity as hard as it might be to believe!
Think small:
OK. Fair enough. But where do you stand on electricity and toilets? How about heat,? Sewer systems? Garbage pick up?
As bas as government housing manipulation has been, it will never end simply because it gives politicians so much power. Along with that power comes votes and kickbacks.
Way to go! Make the recession worse by depressing condominium sales even more. What kind of stimulus is this?
But the government is going to print money to buy back T-bills, brilliant!
interesting info Edumaked. thanks for posting
Don’t worry, condo sales will pick up as the price declines continue. This will happen regardless of the stimuli diversions.
fannie/freddie & mortgage insurers have moved in complete opposite direction of the politicians in regards to the housing market. On one hand the politicians keep talking about the magic 4.5% rate, blah, blah, blah but very very few people qualify for that with the loan-level adjustments and in some cases their rates are approaching 6% when you factor in the loan level price adjustments, especially the hits for credit scores lower than 740.
The .75% adjustment for condo’s translates into about a .25%-.5% higher rate depending on current market pricing.
One of the rules that is blindsiding people though is that if you decide to just rent your condo because you can’t sell it, you now have to qualify with BOTH MORTGAGES even if the condo is leased. The only way you can count rental income is if you can demonstrate you have 30% equity in the property which many do not.
So even if you can legitimately rent your home and make it cash flow or breakeven, have cash for the down payment, and can afford to buy a new place, you still can’t buy a new place.
This was put in place because some folks (really just in CA) are buying new homes at much lower prices, claiming they are renting the old property, and then once the new place closes, they just let the old home go in foreclosure since they are underwater.
Lenders are also attempting to price in rental declines and the obvious risks inherent with accidental landlords.
Not all of our poor are badly housed. The ones that know the system well enough live in the same buildings as the rest of us: east LP, 1400 Lake Shore, Presidential Towers, etc
1. if 70% was required prior to the boom and/or during the boom, we wouldn’t be faced with 2 huge condo projects that have stalled after starting (Waterview and the Spire). We wouldn’t be faced with prices getting further shellacked when thousands of new units come online in 2009 and 2010. A little too late, but this is a reasonable standard that should stay in place. Shovels shouldn’t even enter the ground until a building is 70% sold.
2. Banks (REO’s) don’t pay HOA fees – Owners of units in big Bubble projects are screwed.
3. REO’s are soon going to create a lot of problems here, too. If 20% of a building is in foreclosure, and, of those units, 9 percentage pointswere financed by Countrywide and 5% by BoA (originally), then there’s 14% owned by one entity (BoA).
This could easily destroy the market for Bubble era developments. Pre-Bubble developments should manage. Are there exceptions in these rules for REO’s? There should be, otherwise no one will be able to finance REO units.
Anytime you buy a condo, the lender completes what is known as a condo questionnaire. This questionnaire covers issues such as # of units, presale, % rented, % delinquent, if the HOA is involved in any lawsuits, budgets, etc.
It used to be that with certain down payments and good credit, fannie/freddie would only require a “limited review” which basically wanted to know that there weren’t any lawsuits in the building. Getting a limited review meant that presale requirements were waived because limited review didn’t ask about presale.
Now, very few lenders are doing limited reviews and/or still asking about presale.
The one entity owning more than 10% really applies to individuals and I haven’t seen it come up with REOs. Basically, banks don’t want one individual investor owning more than 10% because if he goes down in flames he can take the HOA with him.
The reality is that the entire country is paying for CA, FL, NV, and AZ. Our issues in this market are driven by financing drying up which is because of the shitty performance of the loans in the above four markets. Miami single handedly killed the condo market for the entire country due to fraud and specuvestors. We definitely had it here, but not nearly at the rates of the other markets.
Instead of segregating markets, banks have essentially just thrown out the baby with the bath water. Much easier to just cut it off for everyone. However, in doing so, they have made ALL markets worse.
Almost 50% of foreclosures nationwide are investors. A large number of those are in condo developments hence why you can’t even get investor financing right now without paying about 3 – 4 points and all the hits for condos.
Edumakated – You are right. Being down in South Florida I can tell you it is crazy what happened here….. And some people are still cheerleading condos here…..oh my, crazy. Chicago is mild mild mild compared to here and CA.
Those places just led the way. Chicago’s decline was inevitable regardless of other locales due to the same reason: a speculative bubble based on unsustainable credit that drove prices way over those indicated by historical rent and income norms.
This is gonan sting.
Here comes the 2nd tsunami of suck for builders and sellers…
er…”gonna sting”…”gonan sting” sounds like something you wake up with after a questionable drunken liason.
Edumakated – This is interesting info. I’m a reporter at Chicago Public Radio working on a story about people having trouble closing now on pre-construction contracts they signed years ago. I could use someone who is very familiar with this stuff to walk me through how the requirements have changed – you sound “edumakated” – could you shoot me an email so we could chat on the phone a bit? agross@chicagopublicradio.org.
Many thanks!
It might be hard for NPR, but don’t fall for the victimization BS:
“The reality is that the entire country is paying for CA, FL, NV, and AZ. Our issues in this market are driven by financing drying up which is because of the shitty performance of the loans in the above four markets.”
The “issues” in this market have to do with no lending standards leading to a speculative bubble that is out of line with historical income/rent ratios. The correction was inevitable.
On the other hand you’ve got the dollar crashing yesterday and today as a result of the fed cranking up the printing presses. Gold is up, oil is up, the Euro is up, TIPS are up. It’s a sure fire way to avoid the deflationary spiral. Now some good old inflation is one way to bring back the housing market and pay off all our debt with cheaper dollars. Of course, it doesn’t do much for widows and orphans.
Good thing I’m locked in at 4.875% on a 30 year fixed! When the inflation monster hits in a few years i’ll be sittin pretty!
A govt policy that is a solution? LMAO. Inflation will create more foreclosures since wages will not keep pace.
Not that they could print enough to match the total of depreciating assets, anyway.
Gary,
I don’t read a lot into yesterday’s data. The Fed didn’t buy all $1T at once, and I think the market was just being reactionary (yes even the bond market).
We’ll see over time what impact this has. Right now the government is saying a lot of things to try to influence the market, but in the grand scheme of things I don’t even think a $1T injection will do much. While significant to the equity market, $1T is not enormous to the credit markets. Heck, several trillion is traded every day in the forex market, to keep things in perspective.
My guess is like others that current mortgage rates are within 1/8 of a point of their near term bottom. So many people are rushing to refinance the lenders can’t keep up so don’t match the treasurys in lockstep. Heck the lowest rates I saw were 4.375% (with points) over the past year and the site is now still listing at 4.5%–too many refies probably testing their capacity so they ticked up.
I think the government will not be happy until 30 year fixed are at 4.5%. The question is will inflation fears prevent rates from going that low? The more the government tries to drive down long term rates the higher the inflation fears and the less anyone else wants to buy long term debt.
However, I disagree with G about foreclosures. If we got high single digit inflation housing prices would go up and wages would go up (maybe not as fast as inflation in the short run) but people who have mortgages now would have it easier paying them off or selling.
I had an opportunity to lock in at a refi at 4.375% when I learned that the 51% requirement was increased to 75%. My condo is at about 55%. That means that I can’t refi and can’t sell since no one else can get a mortgage either. My credit score is 785 and Fannie Mae is preventing me from freeing up some extra cash to go out and stimulate the market! I’m not sure how this is helping things.
Gary, how would higher interest rates make a place easier to sell?
It’s not clear if you are suggesting that “high single digit inflation” would only make “housing prices … go up and wages would go up” without interest rates rising.
I really don’t see wage inflation keeping pace anywhere near high inflation for the same reason wages have lagged inflation (minus the v high earners) during recent times of low unemployment: competition for jobs is worldwide in most cases, let alone the increased pool of avail workers in the US now. It is supply/demand, and the harsh reality is that the US wage bubble will not return now that there are billions more players.
We might get the inflation eventually, but I doubt with any clearly positive impact on housing or wages.
Sarah, a little perspective might help. The 75% rule was always around. It was only during the bubble that it went away. Why should the bank care solely about your credit risk when they really need to consider the collective risk of your entire association?
Bubble buyers didn’t seem to feel that a reversion to normal standards was a risk that needed to be priced in. Not too smart. The easing of standards should have sounded all kinds of alarms for bubble buyers. It was obvious that changing standards (when there were none) and interest rates (when they were at historic lows) could only work against buyers.
So, Sarah, yours is but one in a volume of cautionary tales for the children that will help prevent the repeat of a housing mania for generations to come.
Sarah, there are plenty of options for your place other than refinancing. You could try a short sale, where you give the bank less than you owe, or, get a loan modification. That strategy works well particularly if you are young and have little assets. You’ll take a big hit to your credit score but it’s better than slowly bleeding yourself into bankruptcy. There are literally millions of people out there in your situation and if there was ever a time to try and get out alive this is it.
Was just reading Mauldin’s latest article. Thought this bit might interest people here.
(Gary)Shilling writes:
“We believe that if nothing is done to eliminate surplus housing, prices will fall another 20% between now and the end of 2010 for a total peak-to-trough decline of 37% (Chart 1 below). The resulting further negative effects on the economy will be devastating. At that point, almost 25 million homeowners, or almost half the 51 million total with mortgages, will be underwater… That’s also a third of the 75 million total homeowners, with the remaining 24 million owning their houses free and clear. It would take a little over $1 trillion to reduce their mortgages to the value of their houses, compared to $449 billion for the almost 14 million currently underwater.”
http://www.safehaven.com/article-12886.htm
“We believe that if nothing is done to eliminate surplus housing”???
If he is referring to destroying houses what an idiot. We have several million homeless people in this country.
I think by eliminate he is referring to having the homes sold off to someone not blown up or anything. A lot of the article is trying to build a case for selling homes to new immigrants as a way of keeping housing from deflating. Not that I agree or disagree, just that the numbers are interesting.
I keep hearing from people around me that housing will not fall very much in the future but my gut is telling me something else.