AIG, Fannie and Freddie Put the Crunch on Condo Mortgages

Good luck trying to finance a condo purchase – anywhere in the nation. The Miami Herald “Tough times loom for condo owners seeking loans or re-fis” gives us the short and sweet doom story of condo mortgages. I previously posted that "Banks refuse mortgages on most Miami Condos", about BankUnited (BKUNA) and Washington Mutual (WM) blacklisting most high rise condo buildings in southeast Florida.

Before I go into the latest details, please imagine a world where condos (outside of NYC, Boston, Chicago and LA) have absolutely no value. They are simply transferred between “owners” for the assumption of operating expenses. Don’t laugh. Operating expenses and taxes, without even considering a mortgage, can easily run over $3000 a month for a nice 2 bedroom/2 bath in southeast Florida. Few retirees could swing this. I do not know how real estate taxes would be calculated, but I would not doubt government’s creativity in collecting revenue.

American International Group (AIG) issues private mortgage insurance (PMI) through AIG United Guaranty. Their new underwriting standards (beginning May1) prohibit PMI policies for second homes, condominiums, co-ops, and construction-to-permanent loans in declining markets. In addition to our perennial favorites of CA, FL and NV, the declining markets include a city or town from virtually every state. Regardless of market, AIG rejects PMI when the appraiser or lender “has any other market intelligence or knowledge of the subject property being in a declining market.” This is the first step in returning “moral hazard” back to the lenders.

For those who are curious about the cost of PMI policies that AIG does issue, they are listed on their website. AIG requires condo borrowers provide at least a 10% down payment.

Fannie Mae (FNM) and Freddie Mac (FRE) are making the lenders plight even more interesting. Fannie requires that lenders research and warrant the condominium’s “key characteristics -- their legal documentation, the adequacy of association operating budgets, percentage of unit owners who are late on association fees, percentage of space allocated to commercial use, and percentage of units owned by investors.” The loan officer must also insure that 10% of the annual budget is reserved for “capital expenditures and deferred maintenance.” Freddie is following a similar path.

Fannie and Freddie are now taking a closer look at down payments. At least 5% of the condo’s value must be derived from the borrowers’ own funds.

Given that Fannie and Freddie are the mortgage market and lenders are in no position to accept more liability for loan documentation “errors”, mortgage money for condominiums will become nonexistent. This leaves only cash buyers. This is why I conclude that a condo sale is becoming the transfer of a long-term liability. Not the sale of an asset. The buyer receives a place to live in exchange for the assumption of very high long-term operating expenses. The only trouble is the seller first must pay off their mortgage before being set free.

Disclosure: Author is long FNM and FRE.

Comments

[cfish]

Wow. As far as I can tell, that's pretty much all of Chicago's zipcodes. I guess everybody needs 20% down and income ratios under 3 now. No way the market can support it. Haha

[Malkiel]

This discrimination against condominiums vs other kinds of housing is irrationall would probably meet with regulatory scrutiny. Condominiums make up most of the affordable housing in many markets, and are usually LESS price-inflated than other kinds of housing. If a first-time buyer qualifies for an FHA, and is only able to come up with a 3% down payment which would trigger mortgage insurance provisions, what justification would the mortgage insurer have for refusing to cover simply because the housing in question is a condominium? What about coops and neighborhood associations?

[oddsneds]

There are many Florida condos in Ft Myers for example that have core operating expenses well under $500 / mo. (taxes + homeowner assoc. fees). Theses condos are offered at, (and even sell sometimes!), in this depressed market at $140,000 - $160,000. My mother lives in one and I have seen plenty more. Only luxury condos have $3000 / month operating expenses and the owners of those are getting a lot more services than the basics.

[Yoski]

A friend of mine lives in a 2/2 condo in Bal Harbour (Miami area). She rents it at $1600/month. Taxes run $1000/month, HOA are $600 and special assesments (roof, elevators, swimming pool, etc) are another $250. That's a grand total of $1850/month in operating expenses. Even without considering the mortgage the place is a 1600-1850=<250> a month liability. How much would you pay for a place that COSTS you $250/month when rented? Certainly not anywhere close to the $600K aksing price. Personally I wouldn't pay $1 for it.

[Mkt Blows]

There goes any chances I had of selling my 2/2 townhome in Phoenix that has been on the market for 18 months.

I'm ready for my closeup, Mr. Foreclosure!