Lenders tighten rules for financing condos

Kathy Panco REAL ESTATE

(March 13, 2009) A maze of new rules and requirements affecting how mortgages are granted for condominium purchases will not only make the process more involved, but could require condominium associations to take a look at how they operate.

The changes are so substantial that two seminars will be presented by the local real estate industry later this month and they were filled more than two weeks in advance.

At the center of these changes are mortgage buyers Fannie Mae and Freddie Mac, both of which were beaten into insolvency last year after buying billions in mortgages only to see their value tumble as the real estate market collapsed.

Now, the two government sponsored institutions are working their way back, but with a more complicated set of rules and greater scrutiny of both borrowers and the properties they want to buy. Making matters worse, most people know little about these changes or what they entail.

"I was sitting here listening to some of the nightmares, with loans being denied" because of the new guidelines, said Coldwell Banker Realtor Kathy Panco. "They had been changing their guidelines, but we didn't always know what was changed."

Panco took it on herself to organize a meeting of industry experts including Realtors, lenders, appraisers and condominium associations to review the changes and how the resort market would be affected. That session led to the creation of the March 26 seminar.

Fannie Mae and Freddie Mac hold approximately 80 percent of all the country's mortgages and offer the lowest rates, which is why their new guidelines need to be understood even though there are other financing sources.

There have been so many changes made to condominium financing, said SunTrust Mortgage Vice President Jamie Wetzelberger, that the goal is to "adapt to the current real estate environment." It will not stop interested buyers from receiving financing, she said, it just requires those involved in the sales process to do more homework up front regarding the building and the finances of the condominium association.

"Not only do real estate agents have to find a customer and get them preapproved for the mortgage, now they also have to get the property preapproved. That's probably the biggest change. [Fannie Mae and Freddie Mac] didn't used to be so strict on the property," Wetzelberger said.

The changes only apply to condominium buildings. Other homeowner's associations such as Ocean Pines are classified differently by the lenders. Also, the changes only apply to existing buildings. Those under construction must be at least 70 percent pre-sold by March 1 in order to qualify for Fannie Mae or Freddie Mac financing.

The new criteria Fannie Mae and Freddie Mac are using to determine eligibility for condominium financing call for a comprehensive review of the condominium association's financial statements, documents and budget. New requirements they will be looking for are:

z Fidelity insurance, something many buildings do not have. That protects the association in the event a member steals any of its money. Buildings with less than 20 units are exempt from this requirement.

z A budget line item that accounts for the insurance deductible, to show the money is available in case it has to be spent.

z A reserve fund that contains 10 percent of the total budget.

z Especially troubling for some condominiums is a rule that classifies certain ones as "condo-hotels" and therefore ineligible for financing through the two federal mortgage entities.

Gregg Holland, president of the Coastal Association of Realtors, said this could hurt Ocean City because of the way such buildings are determined. Anything with a rental office inside is considered a "condo-hotel," he said, though many large resort buildings that are strictly condominiums have such offices to ease the sign-in process for renters.

In addition:

z If a building has more than 20 percent commercial space, units could have trouble getting the best rate for financing.

z Optimum financing could be affected if more than 15 percent of the owners are delinquent in paying their fees.

z Buildings where more than 10 percent of the units are owned by a single entity are also considered problematic by Fannie Mae and Freddie Mac.

"It's not that people can't get financed other ways, but people buying here today want the lowest price and best interest rate. They're probably just going to have to search for a different type of bank that doesn't use Fannie and Freddie, and may get a higher interest rate," Wetzelberger said.

All this means that Realtors will have more work to do when selling condominium units, as they will have to research the building and condominium association before the sale to see if the building meets the new financing guidelines.

To get the word out to the real estate community of all these changes and their effect, Panco and her group organized the seminar under the auspices of the Coastal Association of Realtors. Representatives from the real estate industry, appraisers, bankers, mortgage brokers, condominium managers will be on hand to explain the details. All 400 seats for the two sessions have sold out.

"We're being proactive to get on top of what's going on. We don't want this to stop the people from coming here to buy," Panco said.