Wednesday, March 18, 2009

Fannie Says "No Condo Financing For You!"

Perhaps all of the builders frantically breaking ground on multi-family units in the Northeast should've checked in with Fannie Mae.  The Wall Street Journal reports that Fannie is adding restrictions to its condo financing programs.  Fannie used to guarantee mortgages where 51% of the units in a building had been sold but is raising the level to 70%.  Furthermore, Fannie will no longer back loans for sales in buildings where 15% of current owners are delinquent on home owners association fees or where more than 10% of the units are owned by a single-entity.  Fannie says that the new rules protect borrowers (i.e. from their own stupidity) from buying units in buildings that have a high risk of failure and also protect the taxpayer from throwing good money into troubled developments (i.e. we've already punted enough on other crappy investments.)  Additionally, both Fannie and Freddie are raising fees on condo buyers (i.e. we'll make it all back on fees!)

The timing of Fannie's announcement is not particularly favorable for developers hoping that low interest rates will make a dent in the current glut of new condos for sale.  The US finished 2008 with a supply of condos large enough to absorb 14 months of demand.  Furthermore, the supply is set to increase by about 28% this year as 93,000 units are completed nationwide.  A bankruptcy lawyer representing a developer in Chapter 11 says "It's not that there's not demand; you just can't get the financing."  I find this statement to be very amusing.  I'm quite certain that everyone in America would love to have a shiny new condo, probably several shiny new condos, and would gladly finance them with no money-down interest-only loans, thereby creating unlimited demand for condos.  In fact, this is where all of that demand for condos a few years back actually came from, a bunch of people who couldn't afford them without exotic financing.  Developers now have to adjust to more normal demand levels.  The growing disparity between the price of renting and the price of owning over the past few years should've been a warning to developers that actual demand for housing didn't support the runaway prices of condos.  But it was far too convenient to ignore the signs and continue building as long as the party lasted.  Well, the party's over.  Unfortunately, we all have to pay the tab now.    

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