FNMA released new condo eligibility guidelines for mortgages acceptable to be purchased by FNMA in Announcement 08-34. These new guidelines are directed specifically toward condominiums located in Florida. The guidelines specify particular situations that place additional restrictions on condominium mortgages that FNMA will purchase in the secondary market. The new guidelines have an effective date of January 15, 2009.
Some of the highlights are:
- Reduced loan to value ratios.
- 70 percent of the total units in a project must have been sold or under a bona fide contract to a principal residence or second home purchaser. This could affect new buildings such as Trade Winds, Ocean Reef, Origin of Seaheaven, Grand Panama, Shores of Panama, Etc.
- No more than 15 percent of the total units in a project can be 30 days or more past due on the payment of their condominium/association fee payments. This includes the unsold units where the developer is responsible for paying the HOA fees.
- Increased insurance requirements for the HOA and the unit owners.
- Projects are ineligible where a single entity (the same individual, investor group, partnership, or corporation) owns more than 10 percent of the total units in the project. This may affect Emerald Beach where the Wyndham Corporation owns more than 50 percent of the units. If a hedge fund comes in and buys 10-20 percent of a project, say the Trade Winds, it could mean that FNMA would not purchase any mortgages of the remaining units.
- Review of the project HOA budget and income statement, especially for projects where the developer is still in control of the HOA. This could be a problem for projects where the developer has not fully funded the required HOA fees of the unsold units.
- Projects are ineligible where the HOA or developer (if he is still in control of the HOA) is named as a party to current litigation that relates to the project. This could affect Shores of Panama that is in bankruptcy or projects where the developer is being sued for nonpayment of construction work or services.
Lenders are also increasingly reluctant to lend on what they consider to be condo-tels. FNMA may consider projects with any of the following characteristics as condo-tels:
- Front Desk/Registration Service
- Central telephone system
- Daily cleaning service
- Advertising rental rates
- Central key system
- Few or no full time residents
- Short-term rentals
There are exceptions to all of the rules. However, if you have a great contract from a well qualified buyer, don’t be surprised if the loan gets rejected by the lender. Additional loan collateral requirements will mean fewer sales and a longer market recover period.
Sam Portman, www.condotrends.com