Tough Rules For Condos

Tougher rules for condo loans could put blocks on condo purchases. FHA, Fannie & Freddie appear to have increased the percentage of pre-sales required before they will lend on condo purchases and may be screening out projeccts where more than a small percentage of homeowners are delinquent on their HOA dues.

On the surface, these increased underwriting restrictions could make it much more difficult for developers and purchasers alike to transact sales unless the developer steps up and provides the financing. Rep. Barney Frank, who in the past, appears to have been willing to overlook risky mortgage practices, is again telling the lenders to relax restrictions.

Are these restrictions bad? And is Barney Frank wrong? The answer really depends on how one wants to look at the problem. From a buyers standpoint, condo projects with a high percentage of unsold units present some risks. First, the project remains pretty much under the developers control which may not work out to be in the homeowners best interests. But, more importantly, where there is a relatively high percentage of unsold units there is a major risk that the developer will reduce prices to sell the remaining units, whiich step would devalue the units already purchased or, forclosure of the unsold units could result in highly discounted prices as the lender reduces prices to liquidate the properties taken over. Either way, the original group of homeowners could see the immediate value of their units fall.

From the viewpoint of the a developer or seller, these restrictions could be very difficult to deal with as they could, in effect, make it impossible to sell except to someone with 100% equity since any other buyer could not obtain financing. Developers may be able to work around this by providing the financing or the construction lender may provide short term financing until the critical point is reached where sales are sufficient to permit conventional financing. Also, developers of horizontal projects may be able to use the technique of building in phases so that the number of units required to be sold is less than if the entire project were built out at once. But, that definately would not work in high rise projects.

In projects with a relatively high delinquency rate on HOA (Association) dues, there is a real risk that the property will not have adequate funds to provide the services and maintenance that the HOA is required to provide which would work to the great disadvantage of the homeowners and could, under certain circumstances, result in a special assessment.

On balance, the new restrictions may be a convenient way for a lender to turn down loans during periods where there is an excess supply of unsold units in any project as well as protecting borrowers from buying into a troubled projec by just not making financing available.

No matter how one may view the situation, Rep. Barney Frank should absolutely stop putting pressure on lenders and attempting to set underwriting standards. It appears that he didn’t learn anything from his previous application of substantial pressure on the lenders that may, in the last analysis, have contributed to the meltdown of the single family mortgages. It should be very clear to Rep. Frank that the key to reducing the kind of lender risks that caused the current problems is enhanced underwriting standards (much tougher scruitiny of loan applications).

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