Mammoth Real Estate Q&A November 2009

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A Kick In The Mammoth Fannie

Q: We’re looking to purchase a condo in Mammoth but we’re hearing different stories about financing problems. We’ve even heard that some new financing regulations are disrupting the way some local condo projects are operating. What gives?

A: The financing of Mammoth condominiums is a completely different ball game from three or four years ago, almost laughingly so. We’re now paying the price for all those people who were allowed to borrow that shouldn’t have been allowed to borrow. And I’m sure nobody in the general public has any sympathy for real estate agents who are struggling to close the financing and purchases on local condos. But the root problem is trickling down and around and is impacting property owners, business owners and a variety of workers in Mammoth Lakes.

The whole problem is clearly tied to our present national economic mess, and it manifests in little ways in our alpine microcosm. Unfortunately, it is one more thing cutting the cash flow of both the private and public sectors in town. The devil in the details this time is FannieMae. Because this secondary mortgage market giant was so well run in the past decade––and is now controlled by the Federal government––the pendulum has swung on the way they scrutinize loans. And they have become especially stubborn about lending on properties that resemble hotels. The true condo hotel properties that proliferated here in Mammoth and all over the world are simply not what they want as collateral for loans. Most of the mortgage brokers and loan officers feel it is an arbitrary redlining, but it is what it is. The bigger problem here in Mammoth is FannieMae applying these condo hotel-like restrictions on many of Mammoth’s regular old condo projects.

First, let’s look at why FannieMae is probably shunning condo hotel properties. It’s all about risk, and at some point in the last two years condo hotels were deemed at the top of the risk heap. I could argue that today most of the risk has been dissipated with the 50-60% reductions from peak values (but how low will they go?). Condo hotel properties were overbuilt and over-hyped worldwide. (Here in Mammoth we may not be overbuilt, but that is another column for another day.) The oversupply pertains to potential owners and potential renters too. And many of these owners were relying on rental demand to pay the mortgage. All of this coincided with the glorious era of speculation and easy money. This segment of the market is also tarnished by some of real estate’s most “enthusiastic” salesmanship including many of the salespeople becoming buyers themselves––much to their chagrin today.

Another portion of the risk consideration has got to be the overall expenses tied to these condo hotel properties. Regular old common area fees (including most utilities) are on the high side especially for newer properties, and then subtract the higher rental management fees and expenses charged to rentals. Any hotel operator will tell you it costs plenty of money to keep up a happy face. Throw in property taxes at high valuations and the return on investment crumbles fast. That is why today’s condo hotel buyer is more rationally purchasing at huge discounts, paying cash and can probably make it work. And certainly those assessing the risk know there are more defaults and other stresses coming.

In the past few months FannieMae’s risk policy now includes many of Mammoth’s old-guard condo projects with active on-site rentals programs. Loans have been rejected at the very end of an escrow because someone in underwriting googled the name of the project and found flashy websites promoting nightly rentals, Expedia-type reviews, etc. The big red flag is “on-site” rentals. FannieMae now equates that to “condo hotel” and the loan is rejected. The downstream effect––cash buyers only in these projects. And guess what, cash buyers want a discount. The irony: the “excellent on-site rental program” that added value for the average condo owner in the past is now slamming his values because of compromised financing. All of this is now being facilitated by the required scrutiny by local appraisers (and re-appraisals), closer review of the Homeowners Association’s documents and HOA certification, etc. (One appraiser recently said his required photo of the condo project’s sign clearly included the words “Rentals” with an arrow pointing directly at the manager’s office.) Oh, and those nosy underwriters continue doing Google searches.

So how long will this last? People are scurrying all over the place. The mortgage industry is trying to work things out with FannieMae. But FannieMae is in such hot water, nobody is likely to even care. Local lenders are trying to get project approvals one-by-one––projects that don’t have open and notorious on-site rental programs. And some of the big rental projects of the past (Summit, Chamonix, etc.) have already done away with the presence of their on-site rental programs. They now have “project approval” and available financing. Entities that were once operating as on-site rental programs are moving to off-site locations and continuing business. Webmasters are busy altering verbiage and presentations on sites (but ever notice how things linger on the web?). The condo projects that don’t take this seriously may see an erosion of value, at least as long as lenders want to sell their loans to the secondary mortgage market and these policies remain in place. And I can assure you that the asset managers handling bank-owned properties are in tune to all of this because they are looking more favorably upon cash buyers in the condo market. Nobody dealing with this problem believes it will go away soon.

At the same time all of this is going on, general economics is making many Association board of directors look at their expenses and management structures. I’ve been reading more and more association documents as a byproduct of handling bank-owned properties in these projects (and receiving the information). An increasing number of local property management companies are also emphasizing the need for associations to separate the actual property management away from the rental functions. Much of it has to do with allocation and delineation of costs and responsibilities, and the muddling of the two. And for years there have been claims of favoritism by management to owners who have their units on rental programs over those who don’t. Nothing like a sour economy to affect change. It will be good for some and not so good for others.

Meanwhile, if you’re looking to buy or sell a lower-end condo (within the conforming loan limits of FannieMae) in Mammoth it is probably a good thing to understand where any potential project stands as far as lend-ability. It is affecting values on a case-by-case scenario. More “expect the un-expected” in this economy. Just because a mortgage broker/lender says they can do the loan, be careful. A “no problem” response is the first sign that there is a problem. If there is an obvious on-site rental program then that is the first red flag that warrants further investigation and questioning.

But this too may pass, especially if our Congress and President decide everyone should have a tax credit for purchasing an investment-style second home, even if it walks and talks like hotel room. But I wouldn’t count on it. But the way things are going….