Thursday, December 9, 2010

Condominium Financing Markets Lose Government Insured Lending Supports

At the stroke of midnight last night, December 7th, the FHA officially invalidated the condominium approval list that it spent the last 30 years to create.  With this last salvo against the condominium financing market, FHA is signaling the bottom in Condominium lending has just officially begun.  The evolution of condo lending standards has devolved into a cacophony of competing standards.  Clearly, lenders are unable to properly evaluate counter-party risk, building management practices and capital structure using any of the competing standards in Condo evaluation.    The lack of end user Condominium financing amounts to the erection of an Ivory Tower to guard new condominium towers from commoners and homeowners.

The condominium market upon which most of the pre-2007 standards were built, reflected realities for fairly small apartment housing projects with shared ownership starting in the 1970s.  Nobody at the time realized how much more complex and active the market would become when untethered from oppressive Co-Operative Housing Corporation rules and restrictions, when coupled with it's exposure to the mortgage interest tax deduction.

Condominium lending started slowly with the FHA in the early 1970s and by the early 1980s had an organized process to approve condominium projects directly through HUD.   Over the decades, HUD amassed thousands of project approvals covering the 50 states, and available through the "FHA CondoLook" database.  (link: ***  

  The HERA Act of 2008 wiped out the old statute authorizing condo lending, and shifted funding authorization to the Single Family housing statute.  This law caused expiration hard project approval rules, which FHA replaced with administrative guidelines.   The FHA set out a complete refresh of their condominium project approval rules, and these went into effect 1 year ago.  

Notably, the FHA guidelines are used to enable end user borrowers to place 3.5% down payments.  After deducting the 1% financed FHA insurance premium, these buyers are borrowing 39 times their down payment.

The new guidelines discarded a 30 year old legal guidelines agreement between Fannie Mae, Freddy Mac, VA, FHA and HUD.  In addition, FHA the approval process, due diligence practices and eliminated on site inspections.  It placed new emphasis on budget reserves and site insurance analysis, while eliminating on site inspections and the bulk of new construction projects.  As a result, both Fannie Mae and the VA cancelled their approval reciprocity with the FHA earlier this year.   

Meanwhile, Fannie Mae spent 2008 implementing tough new "PERS" Condo Project Approval standards and mandatory national reviews.   By the start of 2009, their failed "get tough on the market" approach yielded to a new "Special Approval Designation" list known as the "Spade" list by industry insiders.  "Spade" approvals are so special that it has taken 9 months for initial lender adoption, mainly because this list included nearly every highly distressed project imaginable.  In fact, it was virtually a case of creating an approved black list by Fannie Mae, since entry on the list virtually guaranteed that local banks and portfolio lenders shunned included projects.  

As of today, Fannie accepts loans through it's PERS process, Special Approval Designation, "Full" Review and "Limited Review" (25% down payment by borrower minimum for no review) or absolutely no review at all for "Refi-Plus" loans.  Got that?  Complicating matters are state by state guidelines for Private Mortgage Insurers who exclude some of the largest condo markets entirely, such as Florida, leaving "Conventional" borrowers with a minimum 20% down payment on all condominiums.

The onslaught of exotic lending products pushed our multi-family single unit financing market is at it's nadir today.  No single project standard is accepted across the secondary market for mortgage lending.  Today's mass expiration of government insured lending eligible condominiums is a blow to every potential owner occupant looking for a starter home in condominium communities.  Until project approval standards are re-evaluated altogether, from today forward, the Condominium finance market will be stuck in neutral until further notice.

(SEE UPDATE at 4:30pm today)

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