NATIONAL NEWS - Big-time mortgage investors Fannie Mae and Freddie Mac and private mortgage insurer AIG United Guaranty recently introduced stricter regulations for condominium mortgages. These new policies discontinue lending in declining markets and force lenders to take full legal and financial responsibility for the absolute accuracy of documents provided by condo projects. These new, more stringent requirements come at a time when lenders are already leery of the condo market and could create a sticky situation for those trying to buy or sell their condos.
Lenders must now analyze condo projects before lendingAs of May 1, AIG United Guaranty no longer provides mortgage insurance for any condos in designated declining markets—even if the buyer has perfect credit. And even condos not located in declining markets have tighter restrictions for mortgage insurance eligibility than they once did. The loan-to-value ratio cannot be more than 90 percent, a minimum of 70 percent of the units in existing projects must be sold and the percentage of investor-owned units in the project cannot exceed 30 percent, according to AIG United Guaranty's "Declining Market, Eligibility and Underwriting Guideline Changes." AIG United Guaranty provides an up-to-date list of declining markets on its website.
Fannie Mae is now requiring lenders to thoroughly investigate condo projects up front and make painstaking analyses of factors such as condo association operating budgets, legal documentation and building-wide percentages of late HOA payments, according to The Wall Street Journal. Freddie Mac has introduced similar changes.
Fannie Mae also wants lenders to take full financial and legal responsibility for the absolute accuracy of all documents provided by these condo projects. "Some condo project legal documents run into the hundreds of pages of text, yet lenders are supposed to take legal and financial responsibility for their accuracy," according to The Wall Street Journal. Many believe that these new restrictions are excessively harsh. "The pendulum swung too far with irresponsible lending; now it's swinging too far the other way," according to Clark Howard of The Dayton Daily News.
Many markets already struggle with condo saturationThe condo market is already struggling. The Multifamily Condo Market Index (MCMI) was at 15.2 as of the end of May, nearly half the 29.6 value from the same time in 2007. "But there is reason to think that buyers are waiting in the wings, ready to buy once they think the market is approaching its bottom. The index value for traffic of prospective buyers is at its highest point since early 2006, when the survey began asking that question," according to the National Association of Home Builders. Even if buyers do emerge, they could find it virtually impossible to find financing. Investors looking to sell condos located in the areas on the declining markets list, or even those in other areas, may find themselves seemingly without options.
Seller financing can be a viable option for investors who want to sell but do not necessarily need all the cash up front. There is a certain amount of risk associated with this strategy but, if investors are smart and cautious in their approach, seller financing could mean the difference between a sale and being stuck with a depreciating condo investment indefinitely. Sellers could choose to have the loan professionally managed by a private loan management company such as Virgin Money to ensure that all legal documents and procedures are handled properly, or they could use a lawyer.
If the idea of seller financing is unappealing and investors don't mind hanging on to their condo for the foreseeable future, they could instead opt to rent until the market stabilizes and condo lending restrictions become more lax. This would offer condo owners the opportunity to take
Source: NUwireInvestor.com