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.
AIG, Fannie and Freddie put the Crunch on Condo Mortgages
Posted 4/20/2008 03:51:00 PM
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Two weeks ago my husband and I closed on a condo in Orlando, Fl. We were priced out of the market in 2004 and refused to rely on both of our incomes to purchase. FYI, we are in the 50K to 75K earning per year category. As this article talks about the first time homebuyer being priced out of the market being the catalyst to the bursting of the housing bubble, I felt it was appropriate to give our opinion here. I have continued to watch and research the real estate market for the past 4 years, watching our dream of home ownership slip further and further away. Just as we were talking about leaving Florida to move to a more affordable location I started to see a light at the end of the tunnel in 2007. We located a place that had been on the market for over a year. This is a 2/2 condo on a large ski lake with complete water views and access. We made an offer of 70% of the maximum price of units that had sold during the height of the boom in 2005. We know we can comfortably make our mortgage payment in case of a further downturn. If the prices continue to fall another 10 to 15% it is not a big deal to us. We got to a point that we could afford to buy and we took the leap. This downturn gave us the chance to cherry pick for the best location and the best house for us. And it was on clearance sale. How often does a chance like that happen? Just like you can't call the bottom of stock prices, you can't call the exact bottom of housing either. All you can do is get to a point where it is undervalued and affordable to you. In my opinion, this year will mark the beginning of a slow, slow rise back to midline.
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