Fannie Move Seen Adding to Condominium Woes

By Jennifer Harmon
MIAMI-Fannie Mae's recent decision to tighten its lending rules to condominium buyers will affect every condo and community in Florida and every community in the United States, according to the president of Association Financial Services here, who says the move is likely to cause another decline in condominium prices and an increase in condominium association fees.
Under the new rules, if an association has more than 15% of its units delinquent over one month, Fannie Mae is not guaranteeing the loan, which means that the bank can't provide the loan unless they plan on holding onto it themselves forever, said Ken Arnold.
"Few banks will be able to do this because that's not their business to hold loans. These mortgages are typically a lower interest rate type loan. It becomes a cash market at that point. The only people that are able to sell their condos are HOAs if somebody comes in with cash because nobody else can get a loan."
Association Financial Services provides loans or lines of credit against the past-due accounts receivable for condo associations or homeowners' associations. Because its underwriting criteria are not as stringent as a bank, it can provide loans to a lot of associations that are not able to get a bank loan. "Lots of times they can't pay their bills because of unexpected delinquencies that are happening more and more. In a cash market home prices are more realistic to market level. Often, it is substantially discounted from what people can afford if they didn't have to come up with all cash," he said.
"It has a dramatic effect on the market. We see already condos being sold 20 to 30 cents on the dollar. That's because if you have cash and can come up with your 20% or 30%, you can go out and buy a condo. As opposed to if a condo was worth $200,000 before, now you need substantially less money."
In quite a few condos, more than 15% of the units are currently delinquent. Many condos and HOAs are not going to pass a Fannie Mae threshold, observes Mr. Arnold. "It is a difficult threshold. There are a lot of condos and I know here in Florida it's pretty dramatic. And that's one of the things that are depressing the entire housing market."
He said the move by Fannie is having a dramatic effect on the entire real estate market. Even if a borrower lives in a regular home, they are competing against a condo that is selling next door for $50,000 when it used to be selling for $200,000. "So now, you have to lower the price of your standard home, because the condos are cheaper," he added.
During the last several months, existing-home sales have increased, and consumers are becoming more realistic as to the true value of their property. As a result, the market is seeing more transactions. Mr. Arnold said he wouldn't be surprised if Freddie or FHA decides to do the same thing, but he thinks Fannie Mae is larger than the other two by far, and that, in itself, has already created pressure.
"The fact that Fannie did it is enough to shake up the market. You don't need all of the providers to fall in line in order for there to be dramatic changes already," he said." Potentially if the banks are out there and they are packaging up these mortgages that they get and now they only have Freddie to sell them to, it really changes the market dynamics quite a bit. They don't have to do the same thing in order for major changes to take place."
Mr. Arnold has heard from some in the mortgage industry that from a developer's point of view, they have people who want to buy the properties but they are unable to get loans. "A lot of times these developers are stuck with a substantial number of units, and they want to be able to convert this to a member owned development. They can't have a healthy association where everybody is paying their Maintenance fees on time. Ultimately, these condo and HOAs have to get their financials under control and make sure they are prepared for what will happen."