Putting a Big Squeeze On Condo Loans

By Kenneth R. Harney
Saturday, April 19, 2008; Page F01

If you own or plan to buy a condominium, an ominous new phase of the mortgage-credit squeeze could be looming for you.

As a result of underwriting changes by the giant mortgage 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 be tougher than you imagine.

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, including some in the Washington area. The ban is irrespective of applicants’ credit scores, assets and equity stakes. Even in the healthiest real estate markets, United Guaranty will require buyers to make at least a 10 percent down payment and will reject applications on units in condo projects where more than 30 percent of the owners are investors.

Buyers with 20 percent or larger down payments will not be affected by the cutbacks in private mortgage insurance. Some mortgage insurers continue to accept applications on condos in declining markets but require down payments of at least 10 percent.

Fannie Mae, a dominant financing source for condominium projects, has rolled out new procedures that some lenders and mortgage brokers say could tighten the availability of loans to condo buyers in the coming months. Freddie Mac has issued similar new guidelines.

Under Fannie Mae’s changes, most of the due-diligence research on the key characteristics of condo projects — 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 upfront by loan officers.

This in itself is time-consuming and costly. In addition, under the new procedures, Fannie Mae expects the lender to warrant the accuracy of its research. Some condo legal documents run into hundreds of pages, yet lenders are supposed to take legal and financial responsibility for their accuracy.

“It’s ridiculous,” said Phil Sutcliffe, principal of Project Support Services of Lansdale, Pa., who helps put together condominium project financing for developers. This not only shifts huge paperwork and time burdens onto lenders and brokers — who may not have staff resources to handle the extra work — but also forces them to make “absolute judgments on things that are not absolute.”

For instance, Sutcliffe said, the new Fannie Mae guidance requires loan officers to make certain that at least 10 percent of a condominium project’s operating budget is reserved for “capital expenditures and deferred maintenance.” Sutcliffe, who has analyzed condo-project budgets for two decades, said there are no wiggle-room provisions in the guidance for “compensating factors,” such as when part of the line-item reserves are for important but nonphysical expenses like insurance.

Some loan officers will simply look at the “reserves” item and, if it’s below the 10 percent mark, reject the whole building and refuse to take loan applications on individual units, Sutcliffe said.

Fannie Mae spokeswoman Marilyn Kornfeld said the new procedures are designed to “protect borrowers and manage increased credit risk in the market.” Freddie Mac spokesman Brad German acknowledged that the changes would make condo loans “more labor- and paper-intensive for the lender” but said weak sales, growing numbers of financially troubled projects and declining property values made them necessary.

Jeff Lipes, president of Family Choice Mortgage in Connecticut, said the Fannie Mae changes combined with other retrenchments mean that when potential applicants inquire about getting a loan, “we really can’t give them a definite answer” because it takes research to determine whether the building qualifies.

“Even if you had an 800 FICO score and 50 percent equity,” Lipes said, “you still might not be able to get a condo loan” under certain circumstances. It all depends on whether the project can pass the highly restrictive underwriting tests, whether it is in a declining market and whether there is a lender “concentration” limit on it. Some large mortgage lenders refuse to finance more than a set percentage of units in a single condo project to limit their exposure to possible losses.

Bruce A. Calabrese, president of Equitable Mortgage in Columbus, Ohio, said “everybody is really backing off condos” because of all the restrictions and changes. He said he owns two condo units — one in Florida, another in Myrtle Beach, S.C. — and even though he is in the mortgage industry, “I don’t think I could refinance either of them right now if I tried.”

Kenneth R. Harney’s e-mail address is KenHarney@earthlink.net.