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.
