Fannie Penalizes Condo Buyers

Just as a flood of new condominiums are scheduled to hit the housing market this year, Fannie Mae has added restrictions making it more difficult for developers to sell their units.

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.

The new policy became effective March 1.

Condo developers say the rules may hasten the failure of countless buildings across the country and seem to be at odds with federal efforts designed to speed along a housing-market recovery.

Moreover, Fannie and Freddie are both set to increase fees on condo buyers next month. Buyers without at least a 25% down payment will have to pay closing-cost fees equal to 0.75% of their loan, regardless of the borrower's credit score. The companies say these fees are necessary to protect against higher default rates.

The changes come as cities brace for a new flood of condo supply. Reis Inc. estimates that 93,000 new condo units will be completed this year, a 28% increase in new inventory from last year. Los Angeles is readying 2,600 units, according to estimates. [Source]

Condo buyers should be aware of add-on fees from Fannie Mae that will increase the cost of their mortgage.

Any buyer considering the purchase of new condo construction should inquire how the initial 70% of units will be financed since Fannie Mae will not guarantee mortgages if fewer units are sold.

Buyers of new construction should also take measures to protect their Initial Deposit in the event: 1) the buyer is unable to obtain acceptable financing; and, 2) the developer goes into default.

Low interest rates will moderate some of the effect of the add-ons. But in this market where developers and buyers may not perform, condo buyers get sucker-punched with extra fees.