RICHARD SHAPIRO:
Return of paperwork

Whether you’re a condominium owner, a mortgage wholesaler or a lender, ever-tightening guidelines from Fannie Mae and Freddie Mac in that market these days can be enough to make your head spin.

“In 2000, virtually every condo was eligible [under Fannie and Freddie rules],” said Chip Poli, co-founder of Poli Mortgage Group in Norwood, recalling the good old days. “Now, it’s close to impossible to understand [the latest guidelines] – and much more difficult to finance a condo.”

Judy Turtz, an originator at Poli Mortgage, who with her boss attended the second of two sold-out Massachusetts Mortgage Bankers Association seminars on “Understanding the New Condominium Guidelines” on April 22, said selling a single-family home loan to government-sponsored enterprises Fannie and Freddie is easy these days compared to a condo.

“With a single-family [home], it’s still about ‘does the borrower qualify?'” she said. But for Fannie and Freddie to purchase a condo loan, lenders now must verify that the property itself meets certain guidelines.

That concerns Debbie Sousa, an MMBA employee who, along with her husband, owns a condo in Dorchester.

“In another day, I’d look at my complex and say, ‘What a great complex. It has 40 units, and almost all are owner-occupied,'” said Sousa, who is a trustee of her condo association.

But now, in order for Fannie or Freddie to back a typical condo loan in which the borrower has less than 10 percent of the purchase price available as a down payment, no more than 15 percent of unit owners can be late on their monthly fees. Freddie requires all condo associations to have a budget, while Fannie exempts complexes with two to four units. But both agencies require lenders to verify that at least 10 percent of an association’s budget is reserved for capital repairs and insurance.

At the moment, 18 percent of the unit owners in Sousa’s complex are late on their fees, she said. She’s also not sure if the budget balance currently meets the capital reserves minimum.

“So right off the bat there, the units are in trouble,” she said, noting that if anyone wanted to sell, most buyers will probably need a Fannie- or Freddie-backed loan.

The policies of the two major government mortgage purchasers have long set standards and baseline in the mortgage arena, but have taken on even greater importance more recently as Wall Street investors disappear.

The number of loans the two companies buy has doubled in the past year, from just under 40 percent, combined, in 2006 to more than 75 percent of all U.S. home loans in the last quarter of 2007.

It’s not hard to see why they’re tightening guidelines. The housing market turmoil hasn’t passed them by. Indeed, Fannie and Freddie lost $6 billion in the fourth quarter and a net $5.1 billion last year, according to the annual report of their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), released on April 15.

“The weakening of Enterprise underwriting standards Â… contributed to poor financial performance,” OFHEO said in its report.

Full View

Freddie Mac Account Manager for New England Regional Lending Ben Niles, who with Fannie Mae Senior Risk Manager for Product Standards Patrick Connolly addressed the lenders and attorneys at MMBA’s recent workshop, said Fannie and Freddie began tightening their condo financing guidelines last fall, as they’d started seeing 60 percent or more of their loan applications come in via Freddie’s “Streamlined Project” and Fannie’s comparable “Limited Project Review” forms.

“Clearly, given the market conditions today, the concentration of risk presented in condo projects, and the fact that so few loans were receiving project underwriting, both agencies felt it was time to make a change,” Niles said.

Now, Fannie and Freddie require lengthy and detailed “Full Project Reviews” to back up most condo loans, including all loans on new-construction condos, all loans on investment properties and loans on which the borrower has a less than 10 percent down payment.

The stricter review is more important in part because the current real estate market is characterized by declining values and fewer sales, which translates into more risk, Niles said.

To complete a full review, in many cases, lenders must approve condo association budgets, make sure the condo documents meet Fannie and Freddie legal guidelines or get an attorney’s opinion letter documenting this, and obtain an engineering report for most new-construction condos to show construction is sound, among other requirements.

“Before, it could all be done by fax or e-mail; now we’re back to so much paperwork,” said Richard Shapiro, a principal at Asset Mortgage Group in Natick.

“They want to see every question answered the way they want it,” on the full reviews, added President Penny Hamel of the Northeast Builders Association, a 400-member trade association representing homebuilders and financers in northeastern Massachusetts.

Connolly said Fannie Mae occasionally allows one of its guidelines to be waived, if the others are met, for a $200 fee. Niles said that Freddie Mac will not, although both said they’re willing to discuss small variations with lenders.

Hamel said in her experience, a lender can still get a streamlined review – if the borrower has more than 25 percent to put down. She said that happens most often on “high-end” purchases or purchases in restricted over-55 communities.

Shapiro predicted that the “percent of owners in arrears” and another Fannie and Freddie requirement that 51 percent or more of the units in any new-construction condo complex must be conveyed to or under agreement with new owners – with no more than 10 percent to the same owner – will be the biggest issues facing local condo sellers and borrowers.

The fact that these conditions can’t always be met could hurt first-time homebuyers, many of whom are looking at condos, he said, while adding that recent decisions by some mortgage insurance companies’ not to insure loans on condos unless the buyer has at least a 10 percent down payment is hurting even more.

But even as he and others bemoan the difficulties of new condo rules, Shapiro acknowledged that at times they “make sense” in the real world.

In January, he recalled, he lost a loan for a newly converted condo at Longwood Towers he had intended to sell to Fannie Mae. Longwood Towers is a former apartment complex in a brick tower in Brookline near many of Boston’s hospitals.

The borrower went to a larger lender after Fannie Mae – which had just changed its guidelines – wouldn’t buy the loan because the common area in the complex wasn’t yet complete. The larger lender was able to keep the loan in its own portfolio.

Four months later, the project’s lender, IStar Financial, is foreclosing on the entire property because not enough of them have sold, he said. The Boston Globe reported on April 17 that the foreclosure would take place May 8. IStar took over Longwood’s mortgage as part of a deal to acquire a real estate loan portfolio from Fremont Investment & Loan, the now-struggling, California-based subprime mortgage firm that originally provided the financing, the newspaper reported.

“When people say condos are tougher, it’s true that there are issues that you have to take into consideration,” Shapiro said.