Fannie Mae tightens rules on mortgages for new condos

As if the demand for new condominiums units hasn't tanked enough, Fannie Mae is throwing an additional wrench into the system by toughening up lending requirements. From a Wall Street Journal story:

Just as a flood of new condominiums are scheduled to hit the housing market this year, Fannie Mae has added restrictions making it more difficult for developers to sell their units.

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won't back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

The new policy became effective March 1, and most lenders have started to implement Fannie's guidelines. Freddie Mac, Fannie's chief rival, hasn't yet followed Fannie's lead.

Fannie says the new rules protect borrowers from buying units in buildings that have a high risk of failure while also preventing the companies -- and taxpayers, given that Fannie and Freddie are operating under government conservatorship -- from throwing good money into troubled developments. Developers can petition Fannie for an exemption from the rule, and so far more than 50 exceptions have been made...

Moreover, Fannie and Freddie are both set to increase fees on condo buyers next month. Buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan, regardless of the borrower's credit score. The companies say these fees are necessary to protect against higher default rates...

The new rules have left developers in limbo. Some are turning their buildings into rental apartments -- at least in the near term -- on the expectation that they won't be able to sell the units anytime soon. Others are selling units in auctions, often at prices discounted steeply enough to entice cash buyers.

Some developers are seeking creative ways to finance units. Asset-management firm New Oak Capital, based in New York, has begun working with developers to offer seller-financing by recycling existing capital from investors and lenders to fund loans that can be sold to investors or lenders once secondary markets recover...

In extreme cases, developers also are beginning to use Chapter 11 bankruptcy protection to restructure and use their remaining capital to provide seller financing. "It's not that there's not demand for the condo; you just can't get the financing," says Craig Rankin, a bankruptcy lawyer representing the principals of West Millennium Group, which has 12 condo projects in Southern California including the Brockman, an 80-unit condo conversion of a historic building in downtown Los Angeles.

Some are turning to their construction lenders to provide seller financing. Projects with multiple buildings are "re-phasing" their development plans to treat each structure as its own condo. Others are offering rent-to-own purchase plans...

Click here for full story.