Fannie Mae Changes Condo Rules

SAN JOSE, CA - Condo builders are reeling from Fannie Mae's decision to raise pre-sale requirements from the hard-to-hit hurdle of 51 percent to 70 percent. Determined high-rise developers are finding ways around the new requirement, though it takes time and money in a housing market already battered by economic turmoil. "We're struggling with buyers, and now we're struggling with this ridiculous requirement," said Christy Marbry, project manager for City Heights, built by Barry Swenson Builder in downtown San Jose.

The new requirement imposed March 1 means that the federal government's mortgage finance company, Fannie Mae, backs only those loans from lenders for projects that have 70 percent of the units already pre-sold. Until that threshold is met, the Fannie Mae-affiliated lender won't close escrow.

"It's hard to keep a buyer interested when you're telling them, 'I don't know when you can close, and there's nothing I can do to help you,'" Marbry said.

She noted that the new requirement doesn't apply to all buyers. Those who pay cash or whose loan is less than the jumbo limit of $417,000 can still find lenders and close escrow. But the new rule definitely narrows the pool of buyers.

At City Heights, San Jose's first tower where prices now range from the high $200,000s to $1 million-plus for the penthouse, 64 homes out of 124 units have sold in the two years since it opened. But in one recent deal, the buyer was stuck by the rule until Marbry found another lender.

Fannie Mae spokeswoman Amy Bonitatibus defended the government agency's decision. In an e-mail, she wrote, "Fannie Mae's pre-sale guidelines are aimed at protecting prospective condo buyers from investing in projects that have a higher risk of failure."

She said Fannie Mae will waive the requirement for projects that fall below the 70 percent threshold but show a "strong chance of success." So far, 90 exemptions to the requirement have been granted, mostly for high-rise projects, which can take longer to sell. She would not say whether any exemptions were granted in San Jose.

"If a project can get to 51 percent, there can be a phasing period," Bonitatibus said, adding, "To have prudent lending standards, the 51 percent is an important threshold."

But Harry Mavrogenes, head of San Jose's Redevelopment Agency, said the city is considering pursuing legislation to overturn the rule.

"More restrictive steps are a great concern to us. Our future in San Jose is high-rise condos," he said. "To put a developer in a situation where you have to have 70 percent of the units committed is a terrible thing for the market."

Builders have discovered that the rule is not hard and fast, but finding the solution is not easy.

Some developers have opted to convert their buildings to rentals. The Lofts on The Alameda, another Barry Swenson project, and The Globe, built by the CIM Group, gave up on the for-sale market and filled their projects with renters. But for the developers who spoke about their San Jose high rises, rentals are not an option.

Phasing the project
At The 88, developer Wilson Meany Sullivan saw last fall where the market was heading and quickly acted to divide its 22-story tower into marketing phases, according to project manager Brandy Bridges.

Dividing the building into chunks allows the developer to apply the pre-sale requirement to a smaller number of units. The 88 now has five such phases.

"(The requirement) sounds awful, but it hasn't been a problem at The 88," Bridges said. "We're focusing on the bottom portion of the building, and we have lenders in place for units below the $417,000 loan limit, and that's a big hunk of the inventory we have available."

Bridges would not reveal how many units have been sold but said the tower's first new homeowners will move in May 1. Prices at The 88 range from the $300,000s to $2 million for the penthouse.

At The Axis, Veronica Roberson of Pacific Marketing Associates said the tower has attracted buyers who are either all cash or are buying units under the conforming loan limit of $417,000. Also, The Axis is dealing with the other federal giant, Freddie Mac, which requires only 25 percent pre-sale, a threshold Axis has met. But to widen the pool, Roberson said she, too, is pursuing dividing the building into marketing phases.

"If they see you have momentum, it's likely they will make an exception once you get to 50 percent," she said. "It's all about momentum and showing marketability."

Diana Chevalier, founder of Project Approval Services, said the calls for her help to obtain federal loan approvals have skyrocketed since the requirement was announced six weeks ago. She said to add to the turmoil, if a builder has to resort to an auction to get units sold, some banks require 90 percent of the units to be sold before they will close escrow for a buyer.

Alan Mark, president of The Mark Co., which is marketing several downtown San Jose high rises, predicted that the requirement, which he called a "moving target," won't last.

"The issue is so fluid that I think it will change again," he said. "It already has changed a number of times. What happens to the New York projects? They're sitting there with 200 units. You won't get to 70 percent."

Paul Campos, general counsel for the Home Builders Association of Northern California, said it's an issue begging for clarity among developers, who not only oppose 70 percent pre-sales but say 51 percent is too high. He is calling for congressional hearings staged around the country that bring all the stakeholders to the table.

"We see confusion among almost all the players. Confusion leads to uncertainty, and in real estate, uncertainty leads to paralysis," he said. "Whoever is right or whoever is wrong, there is more paralysis in the market than there are loans getting approved. There is a desperate need for solid information."