Getting a loan to buy a condo these days is like running a gauntlet: Not only do you often have to dodge a barrage of more difficult requirements from Fannie Mae and Freddie Mac, but now private mortgage insurers have set up a higher bar to leap over.
That is, if you’re unlucky enough to live in large zones – such as Boston, Worcester, or the entire states of California and Florida – that have been declared as “declining” or “restricted” by private mortgage insurers and Fannie and Freddie.
Beginning in late April, the past few weeks have brought new guidelines on which markets were restricted and what would be required of borrowers seeking to buy condominiums in those areas.
While some vary in their designations, a few Massachusetts communities repeatedly make the lists: For example, Boston-Quincy, Worcester, Barnstable and the New Bedford area made MGIC’s declining/restricted market list. AIG didn’t like those towns, either, but lumped Cambridge-Newton-Framingham, Peabody and others into the category as well.
Condo borrowers in those areas now generally must make a minimum 10 percent down payment on their purchase before they can be considered for mortgage insurance, which is a stricter guideline than most companies have for single-family home borrowers.
Mike Zimmerman, vice president of investor relations at mortgage insurer MGIC, said falling property values are the driving factor behind his company’s decisions on declining areas. Within those areas, condo borrowers simply have a higher rate of default, and require higher initial payments to qualify for insurance.
Broker James Green of Boston’s Pride Mortgage, who works with many high-end properties in Boston’s South End and Back Bay, said he doesn’t deal with many at-risk borrowers. But because his neighborhoods are lumped into the broad “restricted” category, he and his clients still deal with extra hurdles.
Aside from higher mortgage insurance, borrowers and their would-be condo homes are subjected to much tougher scrutiny from Fannie Mae and Freddie Mac.
‘Cold Calculation’
Lenders and insurers everywhere are getting more conservative, Green said, but condo borrowers are getting more attention because condo values can fluctuate much more quickly than single-family homes.
Individuals might be scrupulously paying mortgage and condo fees for their units, but the activities of their fellow building-dwellers have an impact, he said. If even a few neighbors default on their mortgages and forfeit their property to banks, the rest of the building’s residents see increased pressure on their values.
Rosemary O’Neill, vice president of Norwell-based Conway Financial Services, said Fannie and Freddie are paying a lot of attention to the health of the overall building, routinely refusing loans if there’s any hint of a problem with other condo owners. Because lenders have ended up taking back many properties through defaulted loans, they’re leery about resale prospects, she said.
Between new restrictions from Fannie and Freddie and higher levels of mortgage insurance, borrowers are feeling the squeeze: “It’s twofold, really,” O’Neill said.
MGIC’s Zimmerman said condo owners sometimes present a higher risk to lenders because the condos aren’t their primary residence. If a condo owner is merely renting out a space, he or she is more likely to let payments slide and go into default. In keeping a roof over their heads elsewhere, borrowers don’t protect their condo investment with the same fervor as their primary residence.
“It’s a cold, economic decision,” he said.
