The Mortgage Crisis May Hamper Condo Financing

An article was published recently in the Minneapolis-St. Paul Star Tribune by Kenneth Harney, a nationally syndicated real estate columnist, that discusses the underwriting changes by Fannie Mae and Freddie Mac, and new restrictions being put into place by private mortgage insurers. As a result of these changes condo loans and refinancings could be more difficult to obtain. According to Mr. Harney, AIG United Guaranty, a major private mortgage insurer, will be changing its underwriting requirements effecive May 1 and will no longer write coverage on condominiums located in certain geographic locations, which it designates as having "declining" market conditions. The ban is across the board in those zip codes, regardless of a borrower's credit score, assets or equity position.

Buyers will see more requirements of at least 10% down. Applications for loans to purchase or refinance a condo located in projects where 30% or more of the units are not owner-occupied may be rejected.

If you are buying a condo and can put 20% or more down, then you will not be affected by the new private mortgage insurance standards.

The new due diligence requirements from Fannie Mae and Freddie Mac essentially shift significant paperwork and time burdens onto the lenders and brokers and also forces them to warrant the accuracy of their research. Another example is Fannie Mae now requires loan officers to ensure that at least 10% of the condominium's current operating budget is reserved for capital expenditures and deferred maintenance. The loan officer will not have any wiggle room to take into consideration other factors that might mitigate or compensate against an lower percentage in the "reserve" category. Due to the up front paperwork burden and rigid requirements an overworked and understaffed lender or broker may simply look at a condo project's line item for "reserves" and if it is below the 10% threshold, then simply reject all loan applications for units in that project.

The end result will likely be that lenders will back off of condos and condo owners will be the losers.

For more information, check out Kenneth Harney's article.

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