The following is a summary of an NAR webinar, held on October 14, 2010, about issues related to the difficulties with condo financing, especially in resort and second home real estate markets.
Host: Deb Howard, Chair, NAR Resort and Second Home Real Estate Committee
Speaker: Joseph Minnich, Senior Risk Manager, Project Standards, Fannie Mae
Introduction: Deb Howard, Chair of the Resort and Second Home Real Estate Committee, opened and set the stage for the webinar by noting that credit and financing options for condos have been scaled back significantly in real estate markets nationwide. This has taken a heavy economic toll, especially in resort and second home areas, which rely heavily on condos as the main driver of those markets. The condo markets in many resort areas have been particularly hard hit by the housing downturn. The current restrictions have made it difficult for condo transactions to be completed, even for buyers with strong credit and healthy down payments.
Deb then introduced George Harvey, 2010 President of the Colorado Association of Realtors, who briefly discussed his recent meetings with Dave Stevens, HUD’s Federal Housing Commissioner. Mr. Harvey stated that Commissioner Stevens was very direct in his belief that the FHA was not created to insure loans in resort/second home real estate markets. However, workforce housing is in the purview of the FHA, and Commissioner Stevens expressed interest in developing guidelines for permanent residents in resort communities, particularly those residents who are just beginning to move up the housing ladder. Commissioner Stevens has asked for input from NAR on these guidelines, and this will be a topic of discussion at NAR’s Resort and Second Home Committee meeting at the Annual Convention in New Orleans in November.
Deb then introduced Joe Minnich, Senior Risk Manager, Project Standards for Fannie Mae.
Mr. Minnich stated some good news: Fannie Mae understands the concerns regarding condo financing and is committed to providing liquidity to the condo market, including resort areas, and indeed, continues to provide financial confidence to these markets. However, Mr. Minnich also noted that the Fannie Mae guidelines are the minimum for evaluating project risk; lenders may establish additional restrictions and criteria based on their own “risk appetite” and underwriting guidelines.
Mr. Minnich discussed several issues related to condo financing, including:
New vs. Established Projects: According to the Fannie Mae guidelines, all of the following 4 criteria must be met for a project to be considered “established”, otherwise it is considered to be a “new” project.
1. At least 90 percent of the total units have been conveyed to unit purchasers;
2. Project is 100 percent complete, including units and common elements;
3. Project is not subject to additional phasing or annexation; and
4. Control of the Homeowners Association (HOA) has been turned over to the unit owners.
The Waiver Process: Fannie Mae has developed the Condo Project Manager (CPM) system to help lenders determine whether or not a project may be eligible for a waiver. Mr. Minnich encouraged Realtors to push lenders to take advantage of this system. However, the project must be strong and developers must provide documentation that makes a persuasive case to Fannie Mae. If the risk is not excessive, the requirements will be waived. If the owner/occupancy rate falls below 50 percent in a project, a waiver may not be granted. Waivers are available, but they must be documented and supportable.
Condo Hotels: Mr. Minnich stated that Fannie Mae is aware of the importance that condo hotels play in resort markets. He also observed that there are many different types of projects in resort areas, so Fannie Mae is willing to review individual projects to determine if they qualify.
One “warning sign” for a condo hotel is whether the project has a front desk that takes reservations and handles nightly rentals. Mr. Minnich stated that merely having a front desk does not automatically disqualify a project from eligibility. Some high-end condos have a front desk to help support the operations and functions of the condo and its owners. However, technology has changed and the key consideration now is whether the project itself is operating a “reservation service” (either through a phone or internet system) that results in a nightly rental operation amounting to a hotel. Having this kind of reservation service moves the project to the hotel side of the condo/hotel continuum.
Condo Fees: A question was asked about the fees that Fannie Mae charges for condo loans – such as the loan level pricing adjustment charge – that are acting as a drag on this market. Mr. Minnich responded that these fees are based on current market conditions and risk, and are continually assessed by Fannie Mae. He does not, however, work in this area and referred NAR to other Fannie staff.
Second Home Definition: Mr. Minnich stated that Fannie Mae’s definition of an eligible second home is that the property owner uses the property for only a portion of the year for personal use and that the property must be suitable for occupancy for the entire year. This would preclude, for example, a property in the Northeast with no heat that is only suitable for habitation certain months during the year.
Webinar participants were particularly interested in hearing/clarifying the fact that the 50 percent owner occupancy included 2nd home owners and that in the "use category", some rental income and/or use by someone other than the owner does NOT preclude the unit from qualifying as a percentage of the owner occupied portion. The distinction was made on the unit category that was for income purposes only, such as "commercial" versus “owner occupied.”
Big Lenders Have Stopped Lending in Resort Condo Markets – How to Get them Lending Again: The concern here is that many large lenders have put the brakes on lending in resort condo markets. What ways are there to encourage them to send these projects to Fannie Mae? Mr. Minnich responded that these lenders may have more stringent loan underwriting criteria than Fannie Mae, which could be why certain lenders are not lending to some of these projects. Mr. Minnich encouraged webinar participants to obtain more information on the underwriting guidelines used by their lenders, check with other lenders that may have not been used before and encourage them to use Fannie Mae’s CPM system.