The alternate universe of condo lending.

Author:Bergsman, Steve
Position:COVER REPORT: THE PURCHASE MARKET
 
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Making mortgage loans for condo purchases is kind of tricky business. But some new players have come on board with tools to simplify things.

The standard line about condominiums is that compared to single-family homes the condo niche is a much more volatile market, subject to wider valuation swings--upward and downward--when the economic cycle turns. [paragraph] Indeed, the spiral downward by the condo market during the Great Recession was so severe that to this day some regions of the country have yet to recover. [paragraph] "I was reviewing Fannie Mae and Freddie Mac requirements in a side-by-side fashion, and at almost every possible interval, each said something to the effect that in regard to condominiums, Florida was subject to a different level of oversight," notes Keith Gumbinger, vice president of HSH.com, Riverdale, New Jersey. [paragraph] "It would appear that condos in Florida are their own special kind of underwriting hell," he said. [paragraph] As a result of so many condo loans blowing up during the recession, the industry tightened lending standards. While these changes to rectify the underlying problems of condo mortgages were needed, it perhaps slowed a return to market normality. [paragraph] "We are nowhere near recovery in condos," observes David Crowe, chief economist and senior vice president at the National Association of Home Builders, (NAHB) Washington, D.C. [paragraph] "The condominium share of multifamily new construction is now down to 8 percent--well below any point in the last 40 years," he says.

The condo piece of multifamily starts bulged to more than 40 percent at the end of the 1970s and early 1980s, plateaued at about the historical average of 22.4 percent from about 1984 to 2004, and then rose to 45 percent in 2005 when, "if you could fog a mirror, you could get a mortgage," Crowe remarks, only somewhat in jest.

Then as the Great Recession settled in, there was a steep slide in the percentage of starts, reaching a low point when condos were only 7.9 percent of multifamily starts in 2014. Crowe doesn't see a resurgence coming anytime soon.

"Condo building will bounce back as the whole housing market gets back to more normal levels," he says.

Better news/corporate initiative

All the news that's fit to print about the condominium markets is not all bleak. The sun appears to be rising above the miasma, and there will be a brighter day tomorrow for condos.

The key factors to re-energize condo interest: Private initiatives and economic trends should improve the condo lending market while at the same time creating more demand for the condo product.

Partly in response to all the condo mortgages that defaulted during the Great Recession, the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs)--Fannie Mae and Freddie Mac--imposed stricter guidelines on condominium developments eligible for unit financing under their condo-lending programs. In short, the condo mortgages had to meet tight eligibility requirements, otherwise FHA financing could not be used or the GSEs would not buy the mortgages for units in the development.

"Condo losses in the economic downturn were more pronounced, and more unknowable, than the single-family stuff," explains Gumbinger.

"All these risks weren't apparent during the boom when folks were buying condos left and right, but when the market turned down, Fannie and Freddie found themselves holding paper against buildings that were substandard or became substandard. It wasn't as if you could cure one unit. In some cases, the finances of the entire building needed to be cured before you could hope to affect any kind of recovery of the money you lent."

The GSEs always had reviews of condominium developments in place, but the new order of the day stemming from the recession was "stringency," Gumbinger adds.

"You can't blame the GSEs for coming out with these more hardball regulations, since the ability of the GSEs or other investors in mortgage-backed securities to recover the money they lent on some of these condos was nil. There were just too many things beyond their control that affected their chances of ever getting their money back, and...

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