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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (143787)	8/30/2008 8:57:04 PM
From: Les H	Read Replies (1) \| Respond to of 306849

Changes may bring dark days for condos Jacksonville Business Journal - by Rachel Witkowski Staff Writer NORTHEAST FLORIDA -- Changes in the underwriting standards of mortgage giant Fannie Mae have caused lenders to look more closely at condominiums and the companies that manage them, often resulting in more rejections of mortgage applications. The new lending requirements imposed by one of the nation's largest buyers in the secondary mortgage market have bled through to lenders' requests from condo management companies in the form of additional lines on questionnaires and legal document requirements. Lenders wanting to sell bundles of mortgages are further scrutinizing association reserves, investor occupancy ratios and the number of past-due loans in the complex. One wrong answer that results in a higher risk to the lender can mean a loan is rejected. Most lenders and management companies are willing to perform further due diligence as a way to prevent another financial market crisis, but the new standards have almost entirely removed investors from mortgage options and further cripples an already dormant condo market. During the past six months, Fannie Mae has gradually rolled out changes such as requiring an established condo project to have no more than 15 percent of its association fee payments more than a month delinquent, lowering the loan-to-value ratio to no more than 90 percent for a condo resident and 75 percent for a second home, and rarely buying condo mortgages from investors. Though the biggest changes have been in place since February, they are just now beginning to hit the condo market. Lenders are in a gray area right now where they're still trying to figure out what will comply with Fannie Mae standards, said Teresa Hale, first vice president of SunTrust Mortgage Inc.'s area operations. While some lenders have been aggressive by only writing loans that would be approved under Fannie Mae's new guidelines, other lenders will write, bundle and attempt to sell the mortgages and then wait to see if Fannie Mae approves them. Fannie Mae used to require a limited review of the condo, but now lenders also have to warrant about 10 to 15 other items primarily because of the concentration of delinquencies in the condo market, Hale said. The main items that Hale said can make or break a mortgage deal are the number of short-term rentals, the space leased out within the building to nonresidents, the condo budget and property insurance. Part of Fannie Mae's new-lender full review requires that at least 10 percent of the association's total budget be in reserves for capital expenditures and deferred maintenance. This makes it particularly difficult in Florida because the state requires a minimal amount of reserves for condo associations, Hale said. The large property insurance increases for condominiums in the past two years have caused a lot of associations to pull from reserves and now lenders are comparing maintenance costs for existing buildings with the amount left in reserves, said Scott Sullivan, vice president of Banning Management Inc., which manages 42 properties in Northeast Florida. Another major change is requiring projects to be majority owner-occupied or second-home purchasers and at least 51 percent of it owner-occupied if the mortgage is for an investor. Sullivan said he has seen the most denials from lenders when the property is less than 60 percent owner-occupied, in particular with new condos. For one local property, where only 41 of 148 units are owner-occupied, "it means the buyer is going to have a hard time getting financing" or even a lower interest rate, he said. Otherwise, either the investor pays in cash or the association would have to change its covenant to allow only a certain percentage of investors, which is difficult to pass. "Our requirements for condo projects are intended to ensure that the project is managed appropriately, and has adequate reserves and appropriate governing documents that will result in stability and sustainability for the entire project and its homeowners," Fannie Mae spokeswoman Marilyn Kornfeld said in an e-mail. Condos have become one of the riskiest parts of the housing industry for lenders as more condo owners default and go into foreclosure, especially after skyrocketing property insurance costs caused associations to enforce special assessments. Because lenders can only hold a certain amount of loans in their portfolio in order to manage risk, most continue to write mortgages by selling them to the secondary market. Fannie keeps a list Though SunTrust Mortgage retains the servicing on nearly all of its loans, Hale said the investors still want to know if it meets Fannie Mae standards. Fannie Mae has a list of condo projects on its Web site for lenders, efanniemae .com, that are warranted and approved by the agency. Lenders are now responsible for submitting a warrant performed internally or through an outside attorney that states the condo is in compliance with the legal requirements. Once approved, Fannie Mae will put the condo on its accepted projects list so lenders can refer to the list rather than repeat the warrant process. The warrant has an expiration date. Community First Credit Union of Florida has made an internal decision that it will automatically reject new mortgage or refinance loans for any project not on the list, said Janet Marcus, mortgage operations manager. It will do so because of the financial costs and additional time it would take to perform the legal reviews for a warrant. Marcus said many smaller financial institutions have a similar mindset. As of May 15, 12 condo projects in Jacksonville, six in Orange Park, two in St. Augustine and one in Jacksonville Beach were listed by Fannie Mae as accepted projects. Marcus said that in the past 30 days, the credit union has denied about half of the requests for a condo loan. However, Community First may revise its decision once it develops a process to adjust to Fannie Mae's warrant requirement. Despite the extensive changes, Sullivan and some lenders said the additional due diligence is prudent in financing a condo and to maintain the financial viability of the lender as well as the condo association. "I'm shocked more people don't ask those questions," he said. "The condo market is taking a big black eye right now because of what lenders did a couple years ago." bizjournals.com