Fighting The Mortgage Wars
Condo Associations and FHA, Fannie Mae & Freddie Mac
By Daniel H. Craven
As a result of the record number of foreclosures in this country over the last few years as well as the multi-billion dollar losses in the banking and mortgage industries, FHA, Fannie Mae and Freddie Mac have instituted policies and regulations which have made it very difficult on mortgage applicants attempting to secure financing on new condos and re-financing on existing condos. Many of these guidelines and regulations were a knee-jerk reaction to the record number of bad loans that have occurred in the last several years. These new guidelines and regulations have become severe headaches for condo associations because it has made it very difficult for financing to be obtained in the condo complexes, thereby, relegating many sales in particular developments to “cash only.” As one can readily see, if units can only be sold via cash, this severely dilutes the pool of potential buyers for condo units, thereby decreasing the value of condo properties.
This article will deal primarily with Freddie Mac and Fannie Mae issues as very few condos in this area deal with Federal Housing Administration (FHA) loans. In fact, virtually all loans that are fixed-rate loans in our area, whether a bank or mortgage broker, are ultimately sold to Fannie Mae and Freddie Mac. As a result, the lender is required to go through a review process involving the condo association and the property to determine if the project is eligible for conventional financing. The two types of approval typically offered are a Full Review and a Limited Review. A Full Review approval allows the applicant to, typically, finance up to 95% to 97% of the loan to value if a condo will be a primary residence, up to 90% of loan to value if a second home, and up to 85% of loan to value if an investment property. For a Full Review, the following criteria must be met for the condo project to be eligible for conventional financing:
1. 51% of units are owner occupied or second home.
2. No single entity owns more than 10%.
3. Maximum commercial space is 20%.
4. No construction defect litigation. All other litigation will need to be reviewed.
5. Budget – line item for reserve with at least 10% of assessments/income being
6. No more than 15% of association dues delinquent more than 30 days.
7. Condominium rentals are not advertised with daily rentals or other hotel type
amenities. (minimum 3-day rental period)
8. Insurance coverage must be sufficient (hazard, flood, liability, fidelity and HO6 if required).
9. Review of condo docs to evidence:
a. compliance with laws
b. limitations on ability to sell or first right of refusal
c. amendments to docs
d. rights of mortgagees and guarantors
e. first mortgagees rights
f. unpaid dues
g. minimum square footage of unit is 400 sq. ft. or greater.
If the condo project does not meet all of the above listed requirements, it must at least meet the following to be eligible for limited review approval:
1. No single entity owns more than 10%.
2. Maximum commercial space is 20%.
3. No construction defect litigation. All other litigation will need to be reviewed.
4. Minimum square footage of unit is 400 sq. ft. or greater.
5. No more than 15% of association dues delinquent more than 30 days.
6. Condominium rentals are not advertised with daily rentals or other hotel
typeamenities. (minimum 3-day rental period)
When the condo project is eligible for Limited Review approval, then the applicant will be eligible for loan to value ratios of up to 90% for a primary residence and up to 75% for a second home. However, investor rental units are not eligible under this criteria. Otherwise, if the condominium project does not qualify for either Full Review approval or Limited Review approval then applicants will be limited typically to adjustable rate mortgages at higher rates.
As a result of the above, one can easily see that condo associations are experiencing pressure from condo owners to make adjustments in the way they have typically done business in order to meet this criteria so the pool of potential buyers for condo units will be as large as possible. In this day and time, maintaining delinquency rates less than15%, in some cases, have been challenging. But, most associations have been aggressive in monitoring delinquencies and taking the appropriate legal steps to collect. The bigger challenge, especially for Alabama condos, is the new requirement that reserves must be 10% of the annual budget. Many associations in Alabama do not meet this criteria and it is difficult in these tight financial times to raise dues or make special assessments to achieve this goal. However many associations now are taking steps and working diligently to increase reserves to the point where this goal can be achieved.
Another troublesome area for condominium projects is being classified as a “condotel” (effectively a hotel). Fannie Mae and Freddie Mac guidelines do not allow for on-site rentals and minimum rental period of less than three days. Many associations are now in the process of amending their documents to reflect this minimum three day rental period. In addition, as part of the review process, Fannie Mae and Freddie Mac are now going online to confirm that associations and rental management companies that extensively rent in condo buildings are not advertising on their websites that daily rentals are available. Many of the leading local rental management companies have changed the way they advertise on the internet in response to these new Fannie Mae and Freddie Mac guidelines.
In conclusion, it is obvious that the rules of the game have changed drastically for condo associations and their owners with regard to obtaining the necessary credit available to achieve and maintain robust condo sales in our area of the country. It is a continuing challenge, one that all of us must keep informed on and work aggressively to deal with. However, since over 95% of loans in our area are sold to Fannie Mae and Freddie Mac, complying with these new guidelines and regulations is a must and being responsive to the needs of condo buyers and sellers is imperative.
Daniel H. Craven is an attorney practicing in Gulf Shores, Alabama who currently represents over 125 condominium associations in the Gulf Shores and Orange Beach area. In addition to holding a Juris Doctorate in Law, he holds a Masters Degree in Business Administration, Bachelor of Science in Engineering and is a registered professional engineer in the State of Alabama. You may contact Daniel Craven at [email protected]