By Nick
Timiraos
The Wall Street Journal - March 18, 2009
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, and most lenders
have started to implement Fannie's guidelines. Freddie
Mac, Fannie's chief rival, hasn't yet followed Fannie's
lead.
Fannie says the new rules protect borrowers from buying
units in buildings that have a high risk of failure while
also preventing the companies -- and taxpayers, given
that Fannie and Freddie are operating under government
conservatorship -- from throwing good money into troubled
developments. Developers can petition Fannie for an exemption
from the rule, and so far more than 50 exceptions have
been made.
Still, 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. "These buildings
are just in purgatory. This new requirement is the straw
that's going to break the back of a lot of projects,"
says Norman Radow, an Atlanta real-estate investor who
works with lenders to rescue distressed condo complexes.
"It's a weight being tied to a drowning industry."
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., a New York-based real-estate firm,
estimates that 93,000 new condo units will be completed
this year, a 28% increase in new inventory from last year.
More than 12,000 units will be completed in New York and
northern New Jersey by year's end. Chicago will add 5,500
units, Seattle has 3,000 units coming online, and Los
Angeles is readying 2,600 units, according to estimates
provided by Reis.
The U.S. finished 2008 with a supply of condos large
enough to absorb 14 months of demand, the highest level
since the National Association of Realtors began its count
in 1999. With more inventory coming online, that figure
is bound to grow.
In New York, the average monthly inventory for condos
reached 5,400 in February, the highest level since appraisal
firm Miller Samuel Inc. began the tally in 1999. "What's
happening in Manhattan is happening in Seattle, in Chicago,
in Boston," says Jonathan Miller, chief executive
of Miller Samuel. "These weren't speculative bubbles.
Any housing market where you restrict the flow of sales
by limiting transactions, that will depress prices."
The new rules have left developers in limbo. Some are
turning their buildings into rental apartments -- at least
in the near term -- on the expectation that they won't
be able to sell the units anytime soon. Others are selling
units in auctions, often at prices discounted steeply
enough to entice cash buyers.
Some developers are seeking creative ways to finance
units. Asset-management firm New Oak Capital, based in
New York, has begun working with developers to offer seller-financing
by recycling existing capital from investors and lenders
to fund loans that can be sold to investors or lenders
once secondary markets recover.
In extreme cases, developers also are beginning to use
Chapter 11 bankruptcy protection to restructure and use
their remaining capital to provide seller financing. "It's
not that there's not demand for the condo; you just can't
get the financing," says Craig Rankin, a bankruptcy
lawyer representing the principals of West Millennium
Group, which has 12 condo projects in Southern California
including the Brockman, an 80-unit condo conversion of
a historic building in downtown Los Angeles.
Some are turning to their construction lenders to provide
seller financing. Projects with multiple buildings are
"re-phasing" their development plans to treat
each structure as its own condo. Others are offering rent-to-own
purchase plans.
The current climate is a marked turnaround from just
a few years ago, when buyers stood in line for hours at
sales offices to put down deposits on units that wouldn't
be completed for years. One big question facing developers:
How many of those buyers who signed contracts will close.
Some may walk because the price of their unit has fallen
beyond the value of their deposit, while others mightn't
be able to qualify for a mortgage.
"Is anyone even going to get a mortgage in a mostly
vacant building?" says Chip Serkland, 37 years old,
who plunked down $22,000 as a deposit for a $435,000 condo
unit at Rollin Street Flats in downtown Seattle two years
ago. The building's opening has been delayed because the
developer hasn't presold enough units. Mr. Serkland doesn't
know if he is still able to get a mortgage even though
he and his wife were prequalified by the building's preferred
lender.
A representative for the developer, Vulcan Inc., said
it was considering how to proceed in light of the new
guidelines. Other buyers say Vulcan has encouraged them
to purchase units in a different Vulcan development that
is closer to being 70% sold.
"The irony in all of this is that the lenders,
by ratcheting underwriting guidelines to some of the most
conservative benchmarks I've ever seen, are effectively
damaging the collateral that they're trying to protect,"
says Mr. Miller, the New York appraiser.
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