I suppose, I as a local REALTOR®, am fortunate that the Hemet - San Jacinto Valley in So Cal is not overbuilt with condos, as much of Southern California is. All of our condo inventory, in the local real estate market is older - most dating back to the early 1990's and earlier.
Throughout most of the region, condos were built at a rapid pace during the recent housing boom. Not only were condos built from the ground up but there were many involved in converting apartment buildings and complexes into condos. Literally, hundreds of thousands of condos were built or converted and sold throughout this decade in Southern California. Unfortunately, as we all know, the real estate market went on vacation shattering the American Dream and left developers, investors and bankers with an out of control inventory that needed to be dumped.
As in all areas of real estate and lending the powers-to-be have been looking at ways of tightening the controls of the marketplace without strangling it. One of the hardest hit areas for lenders and government insurance programs has been in the condo market and so now it is time for lending regulations to get tougher on everyone, on order to protect the governments exposure.
WHAT GOVERNMENT AM I TALKING ABOUT?
Fair Question. When I refer to the 'government' I am specifically talking about the organizations that either buy or insure loans and one way or another are an intricate part of our government...and yet they are removed. To be honest, I'm not real sure I understand it anymore than I understand how a private organization like the Federal Reserve can control our currency. The entities I am referring to, of course are Fannie Mae, Freddie Mack, FHA and even the VA. These entities will be referred to as the 'government' throughout this article and should not be confused with anyone that you get to vote for...these guys are just there...
Fannie and Freddie are the organizations that the banks turn to in the 'secondary market'. What happens is your bank writes and funds the loan. They then bundle your loan and sell them on the secondary market to Fannie or Freddie. Today, Fannie and Freddie loans are considered to be 'Conventional Financing'. Conventional loans require the buyer to put between 10% and 25% cash into the real estate transaction. This is the why and how of the pop in the bubble, as far as Wall Street is concerned, because then Wall Street would sell these bundles all around the world.
The FHA and VA actually insure the loans. Like Fannie and Freddie, they are not involved in the loan process. The banks and lenders are free to loan any amount of money to anyone. However, if they want to free up their resources and exposure, they need to recycle the money by selling the notes on the secondary market. What the FHA and VA both do is guarantee the loans if they meet very specific guidelines that the banks have to ensure are adhered to, if they want to write FHA or VA Loans. Prior to the crash, anyone in real estate will tell you they were more trouble then they were worth. Today, however, FHA and VA loans are the bread and butter of the real estate industry.
What has made FHA loans very desirable is the low cost of entry. The home buyer is only required to put 3.5% down payment into the deal and may ask the seller to contribute up to 6% for closing costs. The FHA has had some very strict conditions that homes must adhere to, in order to qualify for the FHA insurance.
THE WINDS OF CHANGE
The new FHA guidelines for Condos were suppose to go into effect on 11/2/09 but have received a delay for implementation until December 7th, 2010. The current rules can be found on the FHA Website. The new rules can be found in a lengthy PDF Letter published by HUD. Here is an excerpt:
IV. General Requirements
Environmental reviews will not be required for condominium projects approved using the DELRAP option. If the appraiser identifies an environmental condition or the lender is aware of an existing environmental condition through remarks provided on the Builder's Certification, form HUD-92541, the appraisal or other known documentation, the lender must avoid or mitigate the following conditions before completing its review process:
1. The project is located in a Special Flood Hazard Area designated on a Federal Emergency Management Agency flood map.
2. Potential noise issues, where the property is located within 1000 feet of a highway, freeway, or heavily traveled road, within 3000 feet of a railroad, or within one mile of an airport or five miles of a military airfield.
3. The property has an unobstructed view, or is located within 2000 feet, of any facility handling or storing explosive or fire-prone materials.
4. The property is located within 3000 feet of a dump or landfill, or of a site on an EPA Superfund (NPL) list or equivalent state list...
5. The property has any hazards or adverse conditions listed in Section 1.f. of the Builder's Certification, including, but not limited to, high ground water levels, unstable soils, or earth fill.
6. The project is located in a wetland designated on National Wetlands Inventory maps or designated by State or local authorities.
7. The project is on the National Register of Historic Places or is within a historic district listed on the Register.
8. The appraiser or DE lender is aware of any other condition that could adversely affect the health or safety of the residents of the project.
WHAT DOES THIS ALL MEAN?
These new guidelines have an impact on everyone involved. In the long run, once the units are all occupied and in accordance with the FHA guidelines, I imagine that these communities will be a nicer place to live. In the meantime anyone looking to buy or sell a condo has a serious uphill battle in front of them, with some serious hoops of fire to jump through.
BUYERS
Cash buyers will be in a great position to take advantage of the market, especially if you are looking for a place to live. Even those with 20% to 25% down and can qualify for Conventional Financing will be fine. However, fuyers looking to use FHA financing should probably look eleswhere. Most condos are built where they ar as a matter of convenience - close to major roads and retail areas that will often include a gas station most condo projects will be excluded on this basis.
Buyers with low down payments will find themselves excluded from a very traditional first time home purchase.
OWNERS/SELLERS
Perhaps this is the group that will be hit the hardest. Given the fact that every homeowner in Southern California has lost equity, condo owners have not been exempt from this national crises. However, where there is hope for those who bought regular stick built homes that the market will eventually turn and equity will once again be a positive word of hope.
However owners of Condos will be facing a much smaller pool of eligible buyers. Again, just the location factor alone of most condo complexes may permanently exclude them from future government financing programs.
CONDO HOA ASSOCIATIONS
If at all possible, the Boards of the local HOA will be bending over backwards to meet the requirements, if it is possible, to establish a relationship with the FHA. If the association cannot meet the stiff guidelines then their owners may not be able to sell and then look to walk-a-way in a strategic default resulting in a foreclosure and reduced revenue for the HOA which could very well spell trouble for the HOA.
IS THERE AN UPSIDE?
In the short term, the only one to benefit is the FHA with less exposure in the condo real estate market. As mentioned earlier, condos have traditionally been the place many first time home buyers begin their road of home ownership. Condo development and absorption rates will definitely decrease.
The high-end condo complexes found near the waterfront or in downtown communities may be hit the hardest, due to their locations which the FHA now finds to be undesirable. Large suburban complexes will struggle as well, with higher vacancy rates and less HOA dues collected month after month.
The upside has to belong to the banks with the REO Inventories and the Property Managers with rentals to keep rented. Buyers who would otherwise be in the condo market with an FHA loan will now find themselves buying entry level homes or stay in their rental units. Perhaps, once the market stabilizes the FHA will look to relax some of their tougher standards.
HOW LONG CAN CONDO OWNERS WAIT?
Eventually there may be enough political pressure to 'bail out' the condo industry. but until then, first time buyers will be squeezed out of condo purchases due to a lack of financing...sellers will be forced to either stay in their units, despite the growth of a family or other need to move-up or they will just walk-a-way as many homeowners are doing today with a strategic default...HOA boards will continue to scrambel to provide basic services on a dwindeling budget and the banks will be looking at an excess inventory of REO Condos that they are going to have to manage.
So, how bad will it have to get before their is enough pressure to change the new status-quo? Not sure, my crystal ball has been acting up on me...
Comments (2)Subscribe to CommentsComment