Story from Boston.com
Condominiums are becoming more difficult to purchase and refinance as lenders increase fees and tighten regulations to offset what they say is the higher risk of lending to buyers of condos as compared with buyers of single-family homes.
The changes are part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.In addition to paying higher fees to get a loan, prospective buyers now must make down payments of up to 20 percent because companies that traditionally insure lenders against borrowers who default are shying away from condos.
Peter Milewski, an official at MassHousing, the state's afford able housing bank, said condos are considered more problematic to lenders because a few foreclosures can affect property values for an entire complex. Also, he said, they carry monthly fees and special assessments that can create massive collective debts if individual unit owners fall behind on payments.
But Milewski and some other housing specialists believe the changes are too restrictive and may discourage qualified buyers from closing deals at a time when the housing market desperately needs to rebound. Even the state housing bank is challenged by the new regulations, he said.
"There has been a dramatic attempt to overcorrect based on what has happened historically," he said. "The pendulum has swung way past center."
Dena Capano of Salem is one of a growing number of qualified condo buyers forced to comply with the tighter borrowing requirements.
Capano, 24, said she was planning to buy a $129,000 loft in Salem in February when her lender demanded she increase the down payment from 18 percent to 20 percent or lose the loan. Capano said she came up with the extra money, but the deal still almost fell through because the condo association didn't meet another new requirement that it keep more money in reserve for repairs and other shared expenses.
"It was definitely more complicated than one would think," said Capano, an administrative assistant for the Lynn Museum and Historical Society.
Amy Tierce, a mortgage lender at Fairway Independent Mortgage in Needham, said the restrictions and fees, which are in force nationwide, unfairly penalize homeowners in the Boston area, where condo foreclosures have not been as prevalent as in other parts of the country. It's particularly unfair to first-time buyers, who often opt for condos, she said.
"In the Greater Boston area, when you've got less money to spend, a condo is your only choice unless you want to commute two hours," said Tierce. "Everybody has gotten nervous about condos."
Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter, said the condo-buying crunch is a nationwide phenomenon. "It's almost as if condos have been blacklisted," he said. "Financing options are much worse on condos, and it is very difficult to refinance now."
The National Association of Realtors is lobbying Fannie Mae and Freddie Mac, which are controlled by the federal government, to have the rules relaxed.
"A person with good credit and qualifying income ratios, why is that person being additionally harmed because that person wishes to buy a condo property?" said Lawrence Yun, chief economist for the trade group.
"If the buyers are hindered from entering the market, it will deter the housing market recovery."
Fannie Mae and Freddie Mac's guidelines, which vary slightly, affect much of the mortgage lending in the United States because the agencies end up buying or guaranteeing nearly 60 percent of all loans, according to federal data. Private lenders do not need to adhere to the new regulations, but those interested in later selling mortgages to the two federal agencies must abide by them.
One of the Fannie Mae and Freddie Mac lending changes is a surcharge equal to three quarters of a percent of the amount being borrowed. The agencies say the surcharge - which took effect April 1 - translates into about an eighth of a percentage point increase in an interest rate, although it could be higher depending on the borrower's credit rating and other financial details. To avoid the extra cost, anyone buying or refinancing a condo must provide a down payment of 25 percent, or demonstrate that they have equity of at least 25 percent in the property.
Brad German, a spokesman for Freddie Mac, said the point fee is meant to address the added risk of financing condos.
"The market has deteriorated, and the condominium market has become much riskier," German said. "We have adjusted our fees accordingly."
Both agencies also now will only loan to people buying into new developments where 70 percent of the units are already sold - or under contract - to owners who will live there, not those buying properties as investments. Until recently, only 51 percent of units had to be owner occupied. The agencies say the intent is to make sure projects are financially sound. But the change has left some otherwise qualified buyers unable to close loans and caused developers to consider turning condos into rental units.
Fannie Mae officials said they will waive the owner occupancy requirement if they determine a project has a strong chance of success - and has done so more than 200 times nationwide since March.
But developers say the occupancy minimum, combined with stricter lending regulations, is driving away business and keeping them from completing projects.
At the Residences at Atlantis Marina, a new luxury condo complex on the waterfront in Winthrop, several buyers poised to close on new homes earlier this year found they could not get financing because of the new requirements.
Developer Alex Steinbergh said his real estate company, Somerville-based RCG, is trying to find ways to help people move in to the 44-unit development. For instance, he is working with a lender who is willing to waive the new requirements by keeping the mortgages in its own portfolio rather than selling them to Fannie Mae or Freddie Mac. RCG also allowed a couple to lease their condo until they can get a loan.
"We have all of these people who are hanging there," said Steinbergh. "It's a big problem for developers."
Adding to headaches, homeowners who can't come up with a 20 percent down payment have traditionally been required to pay for private mortgage insurance, which protects lenders against loan defaults. But many private mortgage insurers now refuse to cover condos or are asking for down payments of 10 or 15 percent before they will issue a policy.
The changes have pushed some prospective buyers to consider single-family houses rather than deal with the complications of condo financing, said Mark O'Hagan, owner of the real estate company MCO and Associates Inc., in Harvard.
"Welcome to a brave new world," O'Hagan said of the tougher lending stipulations. "It makes it that much more difficult for sales of condominiums."
