Last week the press reported that Fannie Mae had changed its underwriting guidelines for condos. We first reported the problem a two weeks ago as it related to a deal we were working at The Vale Lofts in Tempe. Fannie Mae used to underwrite conventional loans in condo communities if 51% of the condos were either already sold or under contract with legitimate buyers. The new rules increases that percentage to 70%. So think about it. You are a major investor who is considering buying the bank note on a high rise condo building that is in trouble. You figured that you would have to offer seller financing to prospective buyers until you reached the 51% mark. Then, in one fell swoop Fannie Mae changes it to 70%. So in a building like Century Plaza the developer might have to finance an additional 30 condos before any buyer could get regular financing. I would imagine big investors have a trick up their sleeves but I don’t know what it might be.
Another whammy is that any buyer, regardless of how good their credit score, will have to pay a .75% premium when buying a condo in a high rise building. This won’t be a deal breaker for a lot of people but it might persuade some to buy elsewhere.
Yet another challenge? Fannie Mae has also stated that it will no longer do loans in condominium communities where 15% or more of the homeowners are behind in their HOA fees. As we stated in our aforementioned blog post this will be a bigger and bigger issue in condo communities. This particular rule won’t affect buildings like Century Plaza or Safari Drive or one of the other failing buildings because the new owners will bring a large influx of cash to properly “fund” the HOA but it will adversely affect the communities where the developer has already moved on and the HOA is in financial trouble because of foreclosures (e.g. Landmark on Central, The Vale, and others).
So, although we are hopeful that the pending failures of several local buildings will bring much lower prices, renewed buyer interest and potential market recovery we are very concerned that Fannie Mae’s new guidelines might unravel everything.