Fannie Mae Moves to Help Condo Sales

HUGE news for would-be condo investors: Fannie Mae has finally changed the rule that has been strangling condo sales. From now on, when new investors apply for financing on a condo unit, no longer will vacant and foreclosed condos be counted as non-owner occupied.

Until now, Fannie’s long-time policy has been to bar new investor loans in buildings where less than 51 percent of the condos are owned and occupied as principal residences or second homes. Under this rule, many condo communities struggled to stay over 51% due to the high number of foreclosures, effectively only allowing cash sales to take place. This was because Fannie believed that there was a greater risk of default in projects that have high numbers of investor units, with absentee owners renting out their units. You don’t say!

They were correct of course, a fact that has been borne out in Orlando condo communities like Central Park in MetroWest – and I’ll be the first to admit that Fannie’s policy has hurt condo sales terribly. So why has Fannie now decided to walk straight into the gunfire? Does it have anything to do with that $700,000,000,000 bailout?

Anyway, under the revised policy – apparently requested by the National Association of Realtors in November – Ms. Mae says it will now count bank-owned condos that are listed for sale, but are not rented, as if they are owner-occupied when computing the 51 percent ratio. This should mean more loans and therefore more condo sales. Yay.

In buildings that still don’t meet the 51% occupancy test, F.M. says it will allow lenders to ask for waivers by submitting financial information about the project for individual review by Fannie. (Sounds like a complete roll-over to me.)

However, Fannie is keeping its boot firmly on the nose of strugeling developers and still won’t finance condo projects where it believes there are “excessive” sale or financing concessions being offered to buyers. These might include condo communities where developers pay purchasers’ mortgages for long periods of time, or refund condo fees, taxes or HOA dues. This is because Fanie believes that such concessions distort the underlying economics of projects, and may attract buyers who can’t really afford the full payments. Never…

Anyway, in a nutshell, if you were looking to pick up a foreclosure at a condo community but couldn’t get a loan due to the investor ratio – you might want to try again.

So jump back in – the water’s great (and leverage is already back in fashion). And we have reams and reams of condos like this going for a steal. Just make sure you read the condo foreclosures post (below) before you give us a call!~

(See ‘comments’ link for update)

4 Comments

  1. Update January 12, 2008 – From Inman News:
    “Federal housing regulators have agreed to delay for 90 days implementation of a rule change that would bar home builders from offering consumers incentives when they agree to use builders’ affiliated mortgage and title insurance companies.
    The new rule — one of many changes to the Real Estate Settlement Procedures Act (RESPA) being phased in by the end of the year — was set to take effect Jan. 16.
    The National Association of Home Builders sued the Department of Housing and Urban Development on Dec. 22, saying the rule change arbitrarily applies to affiliated businesses operated by home builders. Affiliated businesses formed by settlement services providers like title insurers would still be allowed to offer discounts and settlement services packages.
    NAHB had sought a preliminary injunction against implementation of the rule, but a hearing scheduled for Jan. 9 was canceled after HUD voluntarily agreed to delay its implementation for 90 days.
    A HUD spokesman told Inman News that the department agreed to push back implementation until April 16 in order to “mount a vigorous defense of the merits of the provision itself.” Department of Justice lawyers representing HUD can now focus on defending the rule change from NAHB’s allegations that it is “arbitrary and capricious” and should be thrown out altogether.
    RESPA makes it illegal for settlement services providers to pay kickbacks and referral fees to people or companies that can send business to them. The rule was amended in 1992 to allow real estate brokers, builders, title insurers and others to form joint ventures, known as affiliated businesses, and share profts the companies generate. Consumers must be informed about the relationships between the companies and cannot be required to use any particular provider.
    Affiliated businesses are exempt from the “required use” provision if they offer a combination of settlement services at a total price lower than the sum of the market price of the individual services, and if the discount is not made up by higher costs elsewhere in the settlement process.
    But builders are up in arms because HUD, as part of an update of RESPA rules issued in November, narrowed the definition of “required use” to stipulate that only settlement services providers — and not home builders — qualify for the required-use exemption.
    In justifying the change, HUD said home builders were offsetting the cost of incentives such as home upgrades by charging a higher interest rate, increasing a home’s price, or inflating closing costs.
    HUD spokesman Brian Sullivan said that nothing in the new definition of “required use” prevents home builders from offering incentives or discounts to consumers or suggesting that consumers use their affiliated lender or title insurance business. But it would prohibit them from offering incentives that are only valid if buyers use the builders’ affiliated business, Sullivan said.
    Rather than being true incentives or discounts, such offers actually amount to penalties imposed on consumers if they choose not to use the builder’s affiliated lender or title insurer, HUD maintains.
    Home builders dispute those allegations, saying their incentive programs increase competition, lower costs and give consumers “a full range of options to explore the best possible deal to purchase a home.”
    With home builders trying to clear excess inventory, HUD’s “suspect and radical” definition of required use “could not have come at a worse time,” said William P. Killmer, vice president of NAHB’s advocacy group, in a court filing. The new rule, he said, would “greatly obstruct NAHB’s members from stimulating consumer demand and moving excess supply.”
    The National Association of Mortgage Brokers is challenging another aspect of HUD’s final RESPA rule, filing suit on Dec. 19 over requirements that yield-spread premiums paid by lenders when borrowers take out loans with higher interest rates be credited to borrowers on a new, standardized Good Faith Estimate form being phased in this year.”

  2. The pros and cons of builder incentives
    Letter to the Editor
    By Inman News, Wednesday, January 14, 2009.

    Re: ‘Builders get reprieve on incentives’ (Jan. 12)

    Dear Editor:

    There is in fact much evidence to support the U.S. Housing and Urban Development Department’s charge that builders have been over-offering incentives and then “charging a higher interest rate, increasing a home’s price, or inflating closing costs.”

    On the flip side, there is much to be said for using a builder’s preferred lender, particularly when it comes to condominiums and condo conversions, since lending has become all but impossible on some of these projects.

    Would-be buyers who think they have their lending squared away with an outside lender usually find that they are ultimately unable to close on their purchase. This is frustrating for all parties, particularly the developer who knew that would be the likely outcome. With a preferred lender a buyer knows that the project has already been approved for lending, saving paperwork delays and assuring a clean close for all.

    In short, there are concerns on both sides. Hopefully a sensible compromise can be reached that will satisfy HUD and protect the public while allowing builders to move their inventory.

    Marcus Burke, broker
    Orlando Real Estate Pros
    Condo Metropolis LLC
    Orlando, Fla.

  3. I am trying to purchase a foreclosed condo. The three unit building is now vacant ( all foreclose, last owner just left). I am trying to buy the third unit and eventually I want to buy all the units. A great deal. But, how does one insure a vacant condo and would the banks have a master insurance policy for the common areas.

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