The future of condo new development sales activity across the US appears in serious trouble, yet it doesn’t have to be that way – and its all due to a new government agency, Fannie Mae.
Back in September 2008, when the wheels were coming off the economic wagon, the US Treasury bailed out the former GSEs Fannie Mae and Freddie Mac (and AIG). It was the end of an era where both enterprises served two masters: the US taxpayer (exposure to risk) and its shareholders (profits and share price), to simply serving the former.
The mandate of promoting home ownership at all costs (literally) by these institutions had run amok which is one of the reasons why we are in this mess. While the GSEs served a noble purchase of providing standardization and liquidity to the mortgage market to promote home ownership, somewhere along the way, the link between value and risk was lost because systemic risks were not clearly understood. To be fair, they were simply one part of a giant problem, yet a key part because Fannie Mae set the tone for the mortgage industry and that message was grow at all costs and lend by exception.
Now that Fannie Mae is effectively a government agency, it is getting reacquainted with the religion of risk, and it’s become a quick student by adopting policies that are prudent, but very damaging to the collateral they are trying to protect. It is of great concern because the rules are being changed in the middle of the game, making weak markets worse by stranding thousands of would be buyers and owners. Many new development projects are stalled or have had only a handful of sales since the September tipping point.
The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won’t back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.
Prudent, yet devastating to the existing inventory of newly developed condos across the country – a robotic like ruling that may likely stop most sales activity in new developments if buyers can’t qualify for mortgages. This will simply damage the entire collateral classification (new development condo) and push many existing loans underwater.
Of all the new changes (which are not unreasonable if the housing market wasn’t in crisis) the increase from 51% to 70% pre-sale requirement for a mortgage to qualify for purchase by Fannie Mae makes it nearly impossible for buyers to qualify for a mortgage in a new development unless it is nearly sold out. All the projects that came online late in the cycle could be damaged by this hard core – its a catch-22 really. How does a project claw its way from say 20% sold to 70% sold? All cash lenders and those that ignore Fannie Mae are few.
The policy will result in a higher rate of foreclosures for entire developments as well as individual homeowners who no longer qualify.
In other words, if you helped make the mess, you need to help clean it up, not make it worse. And of course, get a bonus.