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Condo Terminators

Condo Market Fractures Lending Standards

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The deterioration of Condominium lending's standards between housing agencies has ruined the market for homeowners seeking financing.   Agency lending standards for Condos had been settled for nearly 30 years, with the four main housing finance authorities accepting each other's certifications for most projects. Recently, the two lead agencies in Condo financing - Fannie Mae and the FHA - updated their guidelines to achieve divergent risk management goals.  The end result is decreased access to credit, lower Condominium prices in comparison to surrounding single family homes and enhanced losses to mortgage holders.  The Condominium market needs a unifying set of approval standards and reciprocal agreements between housing agencies to revive normal lending activity.

A little historical context and legislative history illuminates the speedy evolution of Condominium Property rights and financing over the last 50 years.  Condominium real property exists as a purely legal construct, first recognized formally in modern law under France's Napoleonic Code of 1804.  The Condominium form of ownership began formally in the United States in Puerto Rico in 1951.

After ten years of lobbying, the National Housing Act of 1961's Section 234 allowed the FHA to insure condo mortgage loans.  Section 234 loans were wiped out  by the HERA Act of 2008.   HERA converted long used rules into flexible guidelines which HUD is open to interpret and change.  The FHA issued the first new Condominium approval guidelines since 1974 in 2009, with the intent of improving risk management.

Thirty years ago, attorneys from the (now) government agencies of Fannie Mae, Freddy Mac, FHA and the VA gathered to create a common standard for the needs of lenders to finance condo mortgages.   That document still provides some of the basic hoops every modern condo agreement should jump, such as minimum rental periods, recordation of documents with proper surveys etc.

Proceeding from those guidelines, there was a thirty year period of reciprocal acceptance of FHA Condo Approval by all parties, and over time, Fannie and Freddie virtually merged their standards with Fannie leading the way.  The former private market-makers also created condominium approval review exemptions (aka "limited reviews") based on the loan to value and occupancy of the borrower which exist today.

  Fannie Mae began changing their Condominium Approval process in 2007 by dropping direct reviews in favor of 100% lender delegated reviews.  After the real estate market calamity in December of 2008 Fannie issued harsh new lending rules for properties in Florida and nationally for new construction projects.   The agency has spent the last 24 months backpedaling from those tough guidelines, and spread fear throughout the market regarding condominiums.

Sadly, the fear spread by Fannie Mae's abrupt pullback sparked the consequences it sought to avoid, namely a collapse in condo prices throughout the market.   In a Minsky Moment, Fannie began quietly advertising to industry sources that even it's toughest PERS approvals would be flexible.  Eventually, they created a whole new approval category called "Special Approval Designation List".  This "SPAD" list is so special, no lender or correspondent wants to issue loans into those projects.

 The FHA was required by HERA to draft new Condominium Guidelines which they issued in late 2009.  The implementation is still being phased in today, after 20,000 expiring projects were given a reprieve from expiration this past December.  Unfortunately, during the break from past practice, Fannie Mae used the opportunity to cancel their reciprocity agreement.

The FHA's new guidelines have heavy emphasis on large cash reserve accounts, and restricting developers from renting unsold inventory while holding the units for sale or lease option sale.  Fannie's new guidelines aim to take a blood sample of each building and analyze the physical plant for flaws, this in addition to the usual financial checkups.

The two largest standard setters have gone in opposite directions.  As a result, the list of approved buildings for both agencies is shrinking.  Mortgage lenders who entered the market after 2005 have suffered losses even with loan to value ratios of 50/50 after some condo prices declined 90% or greater.    Condo owner/directors are rarely informed of the implications of sweeping changes affecting the marketability and price of their homes.   All of this has been happening without stakeholder input in Washington, D.C. aside from the  money center banks who now control vast swaths of the market for new mortgage loan originations.

 The privatization of Fannie Mae and Freddy Mac casts a long shadow at their standards departments during the interregnum.   It seems logical that new standards should be set in the private sector for Condos and the private non-profit corporations governing Condo property.

The fact that two large standard setters cannot agree, clearly indicates that there's no consensus on how to heal the wounded standards for what really separates a functional Condominium from a failed project.  The prolonged existence of the rift is eroding investors' trust in the legal form of Condo ownership's ability to withstand shock.  Ultimately, the condominium financing market needs new defining standards to resume normal functioning.

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National Mortgage Licensing System Goes Live Today

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The National Association of Mortgage Professionals (aka NAMB) fought in favor of a national licensing system for many years.  

 The NAMB had twin goals of allowing better access to multi-state markets for loan originators while simultaneously looking to end the practice of company licensing for non-depository mortgage originators (ie. a "Mortgage Lender" could employ as many unlicensed originators as they wished, while Mortgage Brokers could only use licensees to originate).    A tertiary goal was to stop abusers from state hopping since there was no sharing of data on abusive loan professionals, and in many cases (Florida inclusive) the state licensing systems only checked for state legal action and not Federal crimes (see Florida once again).

 During the boom, unlicensed individuals committed some of the worst abuses.   Countrywide Home loans, for example, was one of the top abusers of the system.  The only sad omission from the new system is employees of nationally chartered banks.  This means that another Countrywide could spring up, and send out legions of unlicensed people, to sell loans on a wholesale basis to non-depository lenders and brokers that are as a class, predatory.  In addition, it was these types of bank reps who encouraged brokers to find loopholes in underwriting guidelines, present and obtain unwarranted lending exceptions or worse.

  Ultimately, I agree with the perspective that it is counter-productive to asses the credit risks of a group of professionals disproportionately stung by the credit bust.   Mortgage brokers are the only real estate lenders who must disclose all of their fees and loan pricing on the Good Faith Estimates today.  The mortgage broker is the only check on bank and non-bank lenders' loan pricing and profit margins.  In addition, a mortgage broker is one of the few outlets remaining for borrowers who need access to private capital (the "hard equity loan") when they do not qualify for a traditional bank loan.   

 As the agents of the banks, mortgage brokers have gotten hit pretty hard in the PR war, being that we're the front lines, the people that the public is acquainted with.  The additional costs of new national licensing are a serious burden on Loan Originators and Brokers like myself, but needed to restore credibility to our profession.  But make no mistakes, if every mortgage broker in the country is sidelined for personal credit issues, it will simply complete the process of tilting the tables completely in favor of the too big to fail banks who caused this mess in the first place.

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