For owners of condominiums who want to sell or refinance, some stunning changes and challenges lie ahead. In market areas across the entire country, things are looking to get more difficult for condominium owners to sell or refinance a condominium.
Announced effective May 1, 2008, if you own a condominium in a declining area, a major private mortgage insurance, AIG, will no longer write coverage.
Their decision is supposedly not going to be affected by the applicants standing on the application. This is not about the applicants credit score or assets. It is about whether the condominium subdivision where the home is located is situated in a declining market area. Other insurers may continue to write that insurance, but may also demand higher minimum requirements for down payments for entry-level buyers.
In a corresponding change, Fannie Mae and Freddie Mac have rolled out new tougher underwriting guidelines for lenders who write loans for condominiums. This involves the level of due diligence that will be required to be performed upfront by the loan officer. What must be reconciled are the subdivisions characteristics and other "compensating factors" such as its legal documentation, adequacy of association operating budgets, percentage of non-owner occupants, percentage of late payers of the unit owners and the amount of reserves and what they are allocated to.
This type of information has usually been supplied here in Southern California by what is known as a Condo Cert. The difference now is that the lender must warrant its accuracy.
What may be onerous is the amount of time and research that it requires and then that the lender must take responsibility for its accuracy. I suspect there may be a conflict when the condominium subdivision owner realizes he can't sell his home because of an association's budget or under designated reserves.
The amount of staff time alone needed to accomplish this is going to make it more difficult for many lenders to do the loan and perhaps even impossible to do the loan if they don't have the staff to accomplish this requirement. My sense of this takes me back to an even more important question. Will these changes have an even greater effect on condominium values? Condominium associations especially those in declining markets may need to revisit costs, budgets and their reserves in overcoming these new challenges.
All these are changes are under the guise of protecting the borrower and better managing the credit risk in the marketplace. But what about homeowners who already own condominiums? If loans are going to get so difficult to administer as to discourage possible new homeownership, how will the current owners protect their homes value in this already declining market?