Loan underwriting guidelines cut into condo market

If you own or plan to buy a condominium, an ominous new phase of the mortgage credit squeeze could be looming on your horizon.

As a result of underwriting changes by giant investors Fannie Mae and Freddie Mac, plus severe new restrictions by private mortgage insurers, getting a loan on a condo unit, or even refinancing one you own, could prove tougher than you imagined.

Starting May 1, AIG United Guaranty, a major private mortgage insurer, no longer will write coverage on condos in hundreds of ZIP codes across the country that it designates as having "declining" market conditions. Even in the healthiest real estate markets, United Guaranty will require buyers to put at least a 10 percent down payment into the deal, and will reject applications on units in condo projects where more than 30 percent of the owners are investors.

Fannie Mae, a dominant financing source for condo projects, has rolled out new procedures that some lenders and mortgage brokers say could tighten up the availability of loans to condo purchasers in the coming months. Freddie Mac has issued similar new guidelines.

Under Fannie Mae's changes, most of the due-diligence research on condo projects' key characteristics such as their legal documentation, the adequacy of condo association operating budgets, percentage of unit owners who are late on association-fee payments, percentage of space allocated to commercial use and percentage of units owned by investors, must now be performed up front by loan officers.

"It's ridiculous," said Phil Sutcliffe, principal of Project Support Services of Lansdale, Pa, who helps put together condominium project financings for developers. Not only does this shift huge paperwork and time burdens on lenders and brokers who may not have staff resources to handle the extra work, but also forces them to make "absolute judgments on things that are not absolute."

For instance, said Sutcliffe, the new Fannie guidance requires loan officers to make certain that at least 10 percent of a condominium project's current operating budget is reserved for "capital expenditures and deferred maintenance." Sutcliffe, who has analyzed condo project budgets for two decades, says there are no wiggle-room provisions in the guidance for "compensating factors," such as when part of the line-item reserves are for important but nonphysical expenditures such as insurance.

Some loan officers will simply look at the "reserves" item and, if it's below the 10 percent mark, might reject the whole building and refuse to take loan applications on individual condo units, according to Sutcliffe.

Fannie Mae spokeswoman Marilyn Kornfeld said the new procedures are designed to "protect borrowers and manage increased credit risk in the market."

Freddie Mac spokesman Brad German acknowledged that the changes would make condo unit loans "more labor and paper intensive for the lender," but said weak sales, growing numbers of financially troubled projects, and declining property values made them necessary.

Jeff Lipes, president of Connecticut-based Family Choice Mortgage Corp., said the Fannie Mae changes combined with other retrenchments battering the condo market mean that when potential applicants inquire about getting a loan on a condo unit, "we really can't give them a definite answer" because it takes research to determine whether their building qualifies.

"Even if you had an 800 FICO score and 50 percent equity," said Lipes, "you still might not be able to get a condo loan" under certain circumstances. It all depends on whether the underlying project can pass the highly restrictive underwriting tests, including whether it is in a declining market.

Bruce A. Calabrese, president of Equitable Mortgage Corp. in Columbus, Ohio, said "everybody is really backing off condos" because of all the restrictions and changes. He said he personally owns two condo units, one in Florida, another in Myrtle Beach, and even though he is in the mortgage industry, "I don't think I could refinance either of them right now if I tried."

Kenneth Harney writes about real estate matters for the Washington Post Writers Group. His e-mail address is kenharney@earthlink.net.