Welcome back to your computer after the Labor Day holiday! Of course, it still feels like a Monday, but at least there are only four work days. Labor Day is usually when the real estate market in most parts of the nation begins to slow down, although lenders are hoping that this year may be an exception with a steady push to take advantage of government programs.
When was the last time someone you know bought a NEW condo? Interestingly, the National Association of Realtors does not measure the sales of new condominiums – only existing units. Condos have long been known as a choice in either vacation areas or in very low or very high priced areas. Therefore, some areas, like Phoenix, Las Vegas, or Miami, received a double whammy in terms of the demand for condominiums, leading to over a year’s worth of inventory waiting to be sold. Prices shot way up, and are now coming down just as steeply, units remain vacant, and projects remain uncompleted. And since developers are usually required to pay off their construction loans after completion, if the project isn’t completed they are not paying off the loans.
Lender Guideline Updates
Union Bank of California recently addressed their guidelines on this topic. As opposed to a single-family dwelling in a subdivision, condos or PUD units are highlighted by “Ownership of a unit, interest in common elements, mandatory homeowners’ association membership, and documents defining/restricting usage of the unit or common elements (CC&R’s). Whether or not the unit is a single-family detached residence located in a condominium project or part of a high-rise building, an attached row house, it typically doesn’t matter.
Fannie Mae, however, has specific requirements for project approval. “Projects approved by Fannie Mae on or after January 15, 2009 are acceptable without additional review as long as the approval has not expired. A printout showing the approval from the Fannie Mae website must be included in the loan file.” You can find a list, complete with approval date here.
Fannie tells their clients that “projects conditionally approved by Fannie Mae are acceptable as long as the approval conditions have been met and the conditional approval has not expired. In most cases, the approval conditions will require that construction has been completed and/or that 70% of the units in the projects have been sold to owner occupied and second home purchasers.” Established projects must usually meet criteria such as, “The unit owners other than the developer control the unit owner’s association; The Condo Project, including all units and common elements, is complete; The Condo Project is not subject to additional phasing or additions that have not been completed; At least 70% of the units in the Condo Project have been conveyed or are under contract to purchasers who will occupy the unit as a primary residence or second home. For the EOM Program, the minimum percentage of owner occupied units is 50%.” There is no owner-occupancy requirement if the condo project has more than 4 units, loan amount < $1,100,000, Owner-occupied primary residence or second home, etc. Please note, however, that if one has condo-related questions, it is best to consult the specific guidelines, which can be quite extensive and go into much greater detail regarding conversions, size requirements, project status, pending lawsuits, ownership, etc.
Lenders know, however, that the condo market is not doing very well from an investor point of view. Fannie & Freddie now charge .75 for any LTV above 75%, and usually investors want to see the Home Owner's Association (HOA) turned over to actual owners, which means owner occupancy above 50%. Fannie will only guarantee mortgages on condo developments where more than 70% are sold. There are signs of life, however. For example, Wells Fargo's wholesale group has told their clients that "Owner occupancy as low as 51% may be allowed for conforming conventional loans up to $417k." Wells also points out that for conforming loans "A minimum 51% of the units sold must be sold to individual for use as a primary residence or second/vacation home with the following criteria: established project, maximum 90% LTV/CLTV for primary residence, maximum 75% LTV/CLTV for second/vacation residence, and this is not eligible for investment properties." And the HOA cannot have over 15% delinquent HOA dues.
Speaking of signs of life, here in Northern California a program has re-emerged after being put on hold for quite some time. CMG Mortgage, a retail and wholesale shop, re-introduced their “Home Ownership Accelerator” program. A few years ago it competed with the program from Macquarie Mortgage (remember them?) which basically uses the balances in your bank account to help reduce the term of your loan. Persistence by CMG’s management pays off in finding an investor for this type of loan!
But investors giveth, and investors taketh away. U.S. Bank Home Mortgage Wholesale Division cut their offering of Freddie’s “Home Possible Neighborhood Solutions Manufactured Homes” immediately due to inactivity. (All other Home Possible products are still available.)
Big News: Treasury Auctions
For economic news, this is one of those weeks where there is not much. In fact, the Treasury auctions may have the greatest impact on mortgage rates this week with $70 billion in 3-yr, 10-yr, and 30-yr auctions today, tomorrow, and Thursday. Thursday we also have Jobless Claims and the Trade Balance figures, and on Friday some import & export price news and the Michigan Consumer Sentiment numbers. With no much going on, mortgage security prices are unchanged from Friday afternoon and the yield on the 10-yr is also about unchanged at 3.45%.
A man had suffered from terrible, excruciating headaches ever since he was a teenager.
Nothing worked, but upon the recommendation of a friend he finally found a doctor who said, “Joe, the good news is I can cure your headaches. The bad news is that it will require castration. You have a very rare condition which causes your testicles to press on your spine, and the pressure creates one helluva headache. The only way to relieve the pressure is to remove them.”
Joe was shocked and depressed. He wondered if he had anything to live for. He had no choice but to go under the knife.
When he left the hospital, he was without a headache for the first time in 20 years, but he felt like he was missing an important part of himself. As he walked down the street, he realized that he felt like a different person. He could make a new beginning and live a new life.
He saw a men’s clothing store and thought, “That’s what I need… a new suit.”
He entered the shop and told the salesman, “I’d like a new suit.”
The elderly tailor eyed him briefly and said, “Let’s see…size 44 long.”
Joe laughed, “That’s right, how did you know?”
“Been in the business 60 years!” the tailor said.
Joe tried on the suit; it fit perfectly.
As Joe admired himself in the mirror, the salesman asked, “How about a new shirt?”
Joe thought for a moment and then said, “Sure.”
The salesman eyed Joe and said, “Let’s see, 34 sleeves and 16-1/2 neck.”
Joe was surprised, “That’s right, how did you know?”
“Been in the business 60 years.”
Joe tried on the shirt, and it fit perfectly.
Joe walked comfortably around the shop, and the salesman asked, “How about some new underwear?”
Joe thought for a moment and said, “Sure.”
The salesman said, “Let’s see…size 36.”
Joe laughed, “Ah ha! I got you. I’ve worn a size 34 since I was 18 years old.”
The salesman shook his head, “You can’t wear a size 34. A size 34 would press your testicles up against the base of your spine and give you one helluva headache.”