Fannie Mae

Black Friday and Cyber Monday Purchases Could Rain On Your Real Estate Closing Day Parade

by Rich Vetstein on November 23, 2010

in Fannie Mae, Mortgages

I’m never one to rain on a good shopping day parade, but the upcoming Black Friday and “Cyber Monday” shopping binges could cause some problems for home buyers who intend on makes big purchases over the weekend, but haven’t closed yet on their real estate transaction.

The reason is Fannie Mae’s Loan Quality Initiative (LQI) rules which have resulted in lenders pulling last minute credit reports and additional verifications of borrower information. If you have racked up a big credit card bill before your closing, these last minute credit checks pull could result in a closing delay, pricing adjustment, or, worst, loan approval cancellation.

So, I hate to say it, but the best thing to do for home buyers is WAIT until after your closing to buy those new appliances at Sears. Your loan officer will thank you!

And thanks to my colleague Pat Maddigan for the head’s up on this issue!

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The Current State Of The Massachusetts and U.S. Residential Mortgage Lending Market

by Rich Vetstein on October 22, 2010

in Fannie Mae, FHA, Foreclosure, HUD, Mortgage Crisis, Mortgages, Realtors, Refinances

David Gaffin of Greenpark Mortgage,  www.massmortgageblog.com, is here with a superb summary of what’s now going on with Massachusetts (and national) residential mortgage market.

The National and Massachusetts Mortgage Lending Picture

Lot’s has been happening in the Mortgage World lately. Refinance business is very good. Purchase business is fair, heading into the all important year end buying season.

I will let this post be a little more free-form than my taking a particular topic and expounding on it (or beating it to death) depending on your perspective.

FHA has changed guidelines… Again.

USDA is still not guaranteeing loans.

Fannie and Freddie need another $200 billion of taxpayer money.

Foreclosures stopped and started again. What could that mean to you and me?

The Fed is meeting on Nov 3 to either lay the hammer down on Quantitative Easing II or will do nothing and really mess up interest rates.

Refinance Now!

1.  So you want to refinance? My suggestions:  A. Get started now! Loan pipelines continue to be backed up. Remember the bad old days when rates were an exorbitant 4.75% for a 30 year fixed rate and everyone re-fied? When was that again? Oh, right. JUNE. Well many of those same people are now re-fiing again in the low 4′s, possibly high 3′s. And people who were late to the party are adding on. So don’t expect your file to be closed in less than 60 days. Many lenders are at 120 days for refinances. If you have a current home equity line of credit that you plan to keep open, add another 30 days or so.

It is not all doom and gloom. I know of many files that were closed in less than 45 days. Purchases always get priority and about 30-35 days is the requirement. If you lender can’t get it done in that time, well my contact info is below.

Don’t be cranky with your loan officer or processor when they request enough paper work to rebuild a forest. The secondary market has really toughened its verification guidelines, cause no one wants to be left holding the bag on a loan that goes bad. Everyone wants to ensure that the underwriting, appraisal and income verification has been double and triple checked.

Good news for Realtors

End of year buying season has begun and the clients that want to be in their new homes by year end must make some decisions soon. We should see a boost in P & S activity over the next 30 days. If that doesn’t come to fruition, it could be a long dark winter for many of my realty friends.  But rates are great! If you bought the same priced home 2 years ago, you would have paid 5-20% more than current prices and your interest rates could have been more than 2.00% higher. Now is a GREAT time to buy. I know that is self-serving, but I am a numbers and value guy. I don’t like seeing the value drop in my house either, but if I were buying I would be psyched!

FHA has changed it guidelines again as of Oct 4

FHA needs money to keep guaranteeing its loans against default. Every borrower pays a fee to get into the program and to ensure its continuation. So the fees got changed.  FHA lowered the UPMIP (up-front mortgage insurance premium) from 2.25% to 1.00%.  Sounds good right? With one hand they giveth and the other taketh away. The monthly mortgage insurance will virtually all FHA borrowers pay has moved from .55% of the base loan amount to .84% monthly. On a $200,000 loan the old cost over  7 years was $12,200 and the monthly MI was $91.67.  Now the projected expense is $13,760 and the monthly MI is $140.00. Most investors have now raised the minimum credit score requirement from 620 to 640. FHA is still the best choice for borrower’s with credit scores under 660 and who may have little equity or down payment or who need higher tolerance levels for debt to income ratios.

USDA Loans

The USDA which offers a great program, or at least did, can’t seem to get its funding in order and therefore cannot issue any conditional guarantees for loans. USDA offers several advantages over conventional and FHA loans but they are proving very hard to get. If  you would like more information on the availability of these loans, send me an email.

Freddie and Fannie are in more trouble with losses.

Do we shut them off and let the private sector take over?  We can but rates would rise dramatically and put an even further damper on the housing market.  Given that TARP actually turned a profit, I think any additional funds to rescue the GSE’s should have an opportunity for the taxpayer to make a return on the re-sold properties even if it takes years to divest the shadow inventory that they own.

Foreclosure Mess

Speaking of shadow inventory… Foreclosures are on again/off again/on again.  For legal thoughts on this check out the Mass Real Estate Law Blog by Rich Vetstein and Marc Canner.

My thoughts are that although there will be a delay to ensure that the legal work has been properly done, people will unfortunately continue to lose their homes. Many will lose them due to the economic downturn or medical reasons. Others will have lost them to predatory lenders or poor decision making on their parts. I don’t really want to get started on “It was all the lender’s fault.” Needless to say, a reason the paperwork requirements exist today, is reliant upon the the lack of paperwork requirements and shoddy underwriting in the past.

I could write several scrolls on this whole mess, but I don’t wish to bore. It may already be too late.

Big Federal Reserve Meeting

Possibly the greatest short to mid-term driver for interest rates will be what the Fed decides or doesn’t decide to do at it’s next meeting. The market has baked in that the FED will ease monetary policy further. If they don’t come through in a big way the stock market most likely will drop and interest rates will rise.  But how much will rates rise? Probably enough that any one who re-fied this summer won’t be able to do so again, or at least until some other economic driver comes to bear. So get off the fence and talk to your loan officer NOW.

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Taking Another Stab at Massachusetts Loan Modifications: Refinancing Underwater Mortgages

by Rich Vetstein on September 21, 2010

in Fannie Mae, FHA, Foreclosure, HUD, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

The recent historic drop of mortgage rates has created a refinancing boom for qualified homeowners. Unfortunately, the refinancing wave washing over the country has paradoxically left dry homeowners who would most benefit:  those who are “underwater.” Underwater mortgages, or “negative equity” (i.e., they owe more on the mortgage than the property is worth) cause foreclosures and serves to bottle up the housing market. Thus, assisting homeowners who are underwater on their mortgage is good public policy. According to a CoreLogic study, there are currently 11 million mortgages underwater and another 2 million nearly at negative equity in the US housing market – a figure that comprises 28% of all residential properties with a mortgage. In Massachusetts, there are 225,000 properties with negative equity and another 52,000 with near negative equity.

The government has made attempts to address this crisis. Last year the Obama Administration created a loan modification program, the Home Affordable Refinance Program, to help refinance borrowers whose loans were worth up to 125% of their homes value. The program did not take hold, and only a relatively minor number of modifications/refinances occurred.

Writing in yesterday’s New York Times, former chairman of the President’s Council of Economic Advisors and current Dean of Columbia Business School Glenn Hubbard penned an intriguing column proposing easier refinancing of underwater mortgages.

Under the proposal, quasi-governmental entities like Fannie Mae, Freddie Mac, the FHA, and the VA would require loan servicers:

  • To send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork.
  • Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to the taxpayers.
  • The agencies would issue new mortgage-backed securities to cover the refinanced mortgages, using the proceeds to pay off the loans held in the existing securities.

The proposal also mandates that existing second lien holders provide a subordination agreement (which benefits the holder because it lowers the default risk).

The program would have immediate benefits: a distressed homeowner could save approximately 15% in their monthly mortgage payment, which would greatly help homeowner’s through the current crisis.

Is there a guarantee that this modification will become law? No, there is not, but it certainly makes sense for policymakers to move on it right away.

In the words of Glen Hubbard, “[i]f we can lower mortgage payments for struggling homeowners, it will reduce future foreclosures on federally backed loans, providing savings to the taxpayers.” And that’s a good thing for everyone.

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Massachusetts Sales Tax Holiday: Home Buyers, Please Wait Until After Your Closing To Splurge

by Rich Vetstein on August 14, 2010

in Fannie Mae, Mortgages

I’m never one to rain on a good shopping day parade, but the Massachusetts sale tax holiday scheduled for this weekend, could cause some problems for home buyers who intend on makes big purchases over the weekend, but haven’t closed yet on their real estate transaction.

The reason is Fannie Mae’s new Loan Quality Initiative (LQI) rules which have resulted in lenders pulling last minute credit reports and additional verifications of borrower information. If you have racked up a big credit card bill before your closing, these last minute credit checks pull could result in a closing delay, pricing adjustment, or, worst, loan approval cancellation.

So, I hate to say it, but the best thing to do for home buyers is WAIT until after your closing to buy those new appliances at Sears.Your loan officer will thank you!

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A Failed Appraisal Experiment To End? The Home Valuation Code of Conduct

by Rich Vetstein on July 24, 2010

in Appraisals, Fannie Mae, Massachusetts Real Estate Law

We are pleased to have a new guest blogger, Jonathan Steinberg, a Certified Residential Appraiser with Abelis Appraisals which provides residential appraisals throughout Massachusetts. Jon was quoted extensively in a recent Boston Globe Magazine article on the challenges of appraising residential property. Jon is here to write about the recent overhaul of the Home Valuation Code of Conduct which revamped the residential appraisal system in the U.S.

This week Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is one of the most radical overhauls and reforms to the banking industry since the days of the Great Depression. The bill will fortunately “sunset,” or put an end to, the Home Valuation Code of Conduct, an ill-advised attempt to revamp the residential real estate appraisal system back on May 1, 2009. The HVCC impacted all Freddie Mac and Fannie Mae loans and has stirred up quite a bit of controversy within the real estate industry.

A Failed Experiment: The HVCC

The HVCC essentially re-wrote how lenders order appraisals. The HVCC’s goal was to remove incentives for mortgage lenders to apply pressure on appraisers to inflate values, understanding that lenders and mortgage brokers normally only get paid if a loan closes. No longer could lenders choose from their own roster of local appraisers who knew the local real estate market. Instead, the HVCC prohibited mortgage brokers from even communicating directly with appraisers, and required that appraisals be ordered through an independent Appraisal Management Company, or AMCs.

One of the biggest complaints of the HVCC and the Appraisal Management Companies is that local, reliable appraisers who had built relationships and business with mortgage companies at reasonable fees were suddenly shut out, and the new AMC appraisers frequently lacked the competency and knowledge of local markets. How could an appraiser from Burlington, Vermont come down to Winchester, MA and effectively appraise a home? Furthermore, while the HVCC may have succeeded at eliminating pressure to inflate appraised values, the common result was that an AMC could now set the market for the fees paid to the appraisers. The AMC profits by distributing appraisals who accept the lowest fees. Additionally, if for some reason the loan doesn’t go through with the first lender, consumers had to get a brand new appraisal for each lender, adding more time, and of course more cost, to the process. A further glaring conflict is that the largest national lenders have significant interest in their own, appraisal management companies. The lenders have created a profit center through the appraisal fee by passing on as little of the appraisal fee to the actual appraiser as possible.

What Remains Of The HVCC

Even with the passage of the financial overhaul bill, some of the HVCC’s skeleton remains. The new regulations still requires lenders to order appraisals and will have AMCs be prevalent in the process.  Lenders can maintain their interest in appraisal management companies, however, appraisers must now be paid a fee that is “customary and reasonable” for that market area. Whatever that means. For the homeowner, appraisals should become more portable; the new rules are supposed to ensure the portability of the appraisal report between lenders or mortgage brokerage services for consumer credit transactions secured by a lien on the principal dwelling of the consumer. The to-be-created Consumer Financial Protection Agency will have the authority to protect the consumer and assure “appraisal independence” through the issuance of new appraisal rules within 60-90 days from the date of the legislation’s enactment. The HVCC is to sunset at the time the new rules go into effect.

Many questions remain however. How will these new rules look and how they will affect this industry? Will they create transparency so the appraisal fee reflects the fee paid to the appraiser and the fee paid to the appraisal management company is itemized on the HUD-1 Settlement Statement? Will borrowers be protected by ensuring that the appraisals are not simply awarded to the lowest bidder with the fastest turn around time, regardless of competency?  Only time will tell.

Thanks Jon for the great insight. And thanks to Patrick Maddigan, Esq. of TitleHub for assistance with this post.

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Fannie Mae Advisory: Pending Condominium Litigation Can Derail Your Condo Financing

by Rich Vetstein on July 21, 2010

in Condominium Law, Disclosures, Fannie Mae, Massachusetts Real Estate Law, Purchase and Sale Agreements, Realtors

If the condominium project that you are buying into is involved in any pending litigation over construction or its common areas, chances are you will not be able to obtain a conventional loan under newer, strict Fannie Mae condominium lending guidelines. This is not good for condominium buyers, lenders, unit owners desiring to sell and condominium associations.

Fannie Mae underwrites the vast majority of mortgages in the United States today. Reacting to the condominium market meltdown, Fannie Mae (FNMA) substantially overhauled their condo underwriting rules, effective Jan. 1, 2009. The new rules require a 70% sell out threshold for new construction project, tough rules governing condominium finances, and new insurance requirements, among other tighter standards. The net effect is that condominium lending has gotten substantially more difficult to obtain, and the real estate industry and some lawmakers aren’t happy about it.

Pending Litigation Involving Safety, Structural Soundness or Habitability

The new guidelines exclude condominium financing for “projects in litigation, arbitration and mediation that arises out of a dispute as to safety, structural soundness or habitability.” Fannie Mae underwriters now look closely at any pending litigation involving the condominium, especially concerning its construction and common areas. I’ve seen several loans denied and canceled recently over pending condo litigation, regardless of the merits of the lawsuit. According to the Fannie Mae FAQ, if the litigation is minor and covered by insurance, lenders can ask Fannie for a waiver or exception.

So how can buyers and realtors protect themselves here?

  • First, prior to signing the purchase and sale agreement, make sure you ask the seller and the listing broker (preferably in writing to create a record) whether there is any pending litigation involving the condominium. Realtors should follow up with the board of trustees or management company. Attorneys can obtain access to the state trial court database to search for pending litigation.
  • If there is pending litigation, borrowers need to inform their lender, and get an answer whether this will affect the financing.
  • If you cannot get an answer by the signing of the purchase and sale agreement, use a clause in the agreement where the seller certifies there is no pending litigation (and assessments) affecting the condominium.
  • Buyers’ attorneys should also use a catch-all Fannie Mae contingency clause which gives the buyer an out if the condominium ultimately is Fannie non-compliant. This should give some additional protection to the buyer, especially where these issues often arise on the eve of closing and after the loan commitment deadline.

The Pendulum Has Swung The Other Way

What’s troubling about the new rules is that many condominiums are involved in litigation, some of which is meritless or frivolous unit owner suits. A lot of lawsuits are covered by the condominium master insurance policy so there is little risk of real loss. That Fannie Mae would summarily deny financing to these condominiums is disturbing to say the least. Overall, I believe that the pendulum has swung way too far. I wrote about this back when the rules were first implemented (still our most popular post), and it’s still true. But it’s the reality. Buyers and their advisers need to be aware of the situation.

Helpful Links:

Fannie Mae Condominium Review FAQ

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Home Buyers, Don’t Go To Home Depot Before Closing! Lenders Pulling Second Credit Reports Under New Fannie Mae Loan Quality Initiative (LQI)

by Rich Vetstein on May 25, 2010

in Closings, Fannie Mae, Mortgages

Fannie Mae’s new Loan Quality Initiative (LQI) mandates become effective on June 1, 2010, and these rules are really taking the mortgage industry by surprise. The new rules could derail some closings for buyers who rack up purchases or even take out new store credit cards before their home sales have closed. The Wall Street Journal online recently wrote about it here.

The June 1 changes are part of a new effort by mortgage giant Fannie Mae to cut down on slipshod underwriting by lenders and frauds by borrowers. Fannie’s so-called “loan quality initiative” will result in lenders pulling last minute credit reports and additional verifications of borrower information. These last minute credit checks could result in a closing delay, pricing adjustment, or, worst, loan approval cancellation.

  • The last-minute credit report will be designed to find out whether a borrower has obtained — or even shopped for — new debt between the date of the loan application and the closing. If borrowers have made applications for credit of any type — for furnishings and appliances for the new house, a car, landscaping, a home equity line, a new credit card — the closing could be put on hold pending additional research by the lender. Our advice: save the trip to Home Depot, Restoration Hardware and Crate & Barrel until after the closing.
  • If you’ve taken out new loans that are sizable enough to affect the debt-to-income ratio calculations used in your original mortgage approval, the deal could fall through. The added debt load could render you ineligible for the mortgage because you suddenly appear unable to handle the payments without a strain on your household budget.
  • Many lenders already pull second credit reports right before the closing, but the Fannie Mae mandate will likely result in a markedly increased number of lenders pulling second credit reports and performing other last minute verifications.
  • Borrowers should be counseled to avoid obtaining or applying for new credit, or even increasing utilization of existing credit, before their closings. Lenders may view this added debt as a strain on a household budget sufficient enough to make a once qualified borrower now appear unable to handle the payments. If these new loans are sizable enough to affect the DTI (debt-to-income) ratio calculations used in the original mortgage approval, then the deal could fall through.
  • Under the terms of the standard purchase and sale agreement, a borrower who loses his financing  just days before the closing due to LQI issues could potentially forfeit his deposit. Buyer’s attorneys should think about how to address this in their P&S riders.
  • The mortgage and real estate industries are still trying to adjust to the dynamic changes in the economy, making it more important than ever to seek out professional, knowledgeable mortgage brokers and to seek counsel from experienced attorneys specializing in real estate law. In the end, the best advice may just be avoidance; borrowers will be best off not obtaining any additional credit in the time between the application for a mortgage and the date of closing.

Thanks to my colleague, Patrick Maddigan, Esq., for assistance with this post.

Helpful Links

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The 2 Major Snags That Can Derail Your Mortgage Loan: Significant Home Repairs And A Low Appraisal

by Rich Vetstein on May 19, 2010

in Appraisals, Fannie Mae, FHA, Massachusetts Property Values, Mortgages

The mortgage lending underwriting environment has changed dramatically in the last several years. At the peak of the bubble, mortgage professionals joked that you needed only to be able to fog a mirror to get a loan. These days, even borrowers with good incomes and good credit scores can get turned down.

Much of the change is driven by the stricter underwriting standards imposed by Fannie Mae, Freddie Mac and FHA. There are two major issues which come up repeatedly in transactions today which can derail a borrower’s loan: (1) extensive home repairs, and (2) a low appraisal.

The house requires substantial repairs

A lot of properties on the market these days are foreclosures owned by banks, short sales, or otherwise aren’t in great repair. Further, in a buyer’s market, sellers will not hesitate to agree to a list of repairs.

Broken windows, defective appliances, roof leaks, unfinished renovations, and serious water damage can all cause problems with obtaining final lender approval of the loan. At worst, the a substantial amount of required repairs could cause a lender to bail out. At best, the lender will require a pre-closing inspection and make the loan commitment subject to the satisfactory completion of all work.

Talk to your lender before the purchase and sale agreement is signed to figure out the extent to which substantial repairs will affect the underwriting process.

The appraisal is lower than the purchase price

Occasionally during the bubble an appraiser would decide a home was worth less than the price a buyer and seller had agreed upon. But that was relatively rare. Critics accused appraisers of colluding with lenders to “hit the number” — deliver the values needed for loans to be approved.

These days, appraisals are administered is a completely different fashion. New rules – the Home Valuation Code of Conduct (HVCC) – hold appraisers to higher standards and sharply limit communication between appraisers and lenders. Mortgage professionals cannot select their “hand-picked” appraiser now; there is basically a random lottery system to select the appraiser. The downside of this lottery is that the appraiser may not be very familiar with the town or neighborhood being appraised. So the appraisal may fall short of the agreed-upon selling price. Even if the first appraisal goes well, a second evaluation — known as the review appraisal and now ordered by most investors that buy home loans — may not.

Today buyers, sellers and their agents often attempt to manage the appraisal process by recommending better comparable sales available than the ones the appraiser used. As a buyer’s attorney, I always negotiate an “out” in the purchase and sale agreement for the buyer’s protection in case the appraisal comes in too “low.” If the appraisal remains under the purchase price, buyers may need to reopen negotiations with the seller or come up with a bigger down payment to make a deal work — or pay down their mortgage in order to refinance.

Have you felt the change when you have tried to get a loan?

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Fannie Mae Tightens Its Belt On Adjustable Rate (ARM) and Interest Only Mortgage Programs

by Rich Vetstein on May 12, 2010

in Fannie Mae, Massachusetts Real Estate Law, Mortgages

We are thrilled to have Sheira MacKenzie, a Certified Mortgage Planner with Fairway Mortgage in Needham, MA, who is here to guest blog about the new, tighter Fannie Mae lending underwriting guidelines on adjustable rate and interest-only loan programs. You can contact Sheira at 781-719-4673 or by email [email protected]. Her website is www.sheiramackenzie.com.

Overview Of Changes

Sheira MacKenzie, Fairway Mortgage

For the first time this year, Fannie Mae announced significant updates to its mortgage underwriting guidelines. The changes include strict new ARM qualification standards, the elimination of a once-popular 7 year balloon loan product, and tighter rules for interest only mortgages.

Fannie Mae made its official announcement on April 30, 2010.  The changes will roll out over the next 12 weeks.

These changes are intended to ensure that shaky borrowers can afford an adjustable rate mortgage not only during the first fixed term, but once the rate adjusts even higher.

Borrowers Need More Affordability Muscle For Their ARMs

The first guideline change is tied to ARMs of 5 years or less. This is a huge change which will really impact the ARM market. Mortgage applicants must now qualify based on a mortgage rate 2% higher than their note rate. For example, if your mortgage rate is 5%, for qualification purposes, you must be able to afford a 7% interest rate. The elevated qualification payment will disqualify borrowers whose debt-to-income levels are borderline.

Adjustable Rate Mortgages are still a great product… for the right consumer. Today, it is critical to have a team of experts to help borrowers to determine the right loan strategy for their needs. In Massachusetts, we see slightly higher incomes, but consumers need to be aware of their overall monthly obligations prior to applying for a loan. Take your gross monthly income and multiply it by 35%. If your new housing payment (including taxes, insurance, or condo fee) plus your car, credit, and other loan payments is higher than that number, you could be over-extending yourself in the eyes of investors today. Get introduced to a seasoned mortgage expert who can review your credit and monthly obligations with you, and be sure to check with your financial planner prior to embarking on the approval process. Together you can determine if you are best suited for an ARM or fixed rate as well as the best loan strategy for your short and long-term goals.

Pop Goes The 7 Year Balloon Program

The second change is Fannie Mae’s elimination of the standard 7-year balloon mortgage.  Balloon mortgages were popular early last decade.  Lately, few borrowers have chosen them, though.  Mostly because rates have been relative high as compared to a comparable 7-year ARM.

Interest-Only Belt Tightening

Lastly, Fannie Mae is changing its interest only mortgages guidelines. Effective June 19, 2010, Fannie Mae interest only mortgages must meet the following criteria:

  1. The home must be a 1-unit property
  2. The home must be a primary residence, or vacation home
  3. The borrower’s FICO must be 720 or higher
  4. The mortgage must be a purchase, or rate-and-term refinance. No “cash out” allowed.

Furthermore, borrowers using interest only mortgages must show two full years of mortgage payments “in the bank” at the time of closing. Earlier this year, Fannie Mae’s sister, Freddie Mac, announced that as of September 2010, it will stop offering interest only loans altogether.

Between Fannie Mae, Freddie Mac, the FHA, and other government-supported entities, the U.S. government now backs 96.5% of the U.S. mortgage market. So long as mortgage default rates are high, expect approvals for all borrower types to continue to toughen.

Great post Sheira! We welcome you to the ever-increasing stable of guest bloggers on the Massachusetts Real Estate Law Blog. And we can attest from working with Sheira that she is truly a highly experienced, trusted professional, whom any buyer would be fortunate to have on their team.

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The Condominium HO-6 Insurance Policy: Fannie, Freddie & FHA Required

by Rich Vetstein on April 6, 2010

in Condominium Law, Fannie Mae, FHA, Insurance, Massachusetts Real Estate Law

“Walls In” Condo Unit Coverage Required By Many Lenders

A HO-6 policy is like a regular homeowner’s policy, but for a condominium unit, and with a lot more extras. HO-6 insurance policies cover the interior of the unit and personal property inside–commonly known as “studs in” or “walls in” coverage.

HO-6 Now Required By Lenders

Under the new Fannie Mae (FNMA) and FHA overhaul of condominium lending guidelines, lenders are now requiring HO-6 policies for new condo unit purchases. Sounds like common sense, but HO-6 policies weren’t always required by lenders, and many condominium unit owners were under the mistaken impression that the master condominium insurance policy covered all damage to the interior of their unit as well as damage to furniture, appliances, etc. That isn’t so. In most cases, that master insurance policy covers common areas such as the hallways, roof, basement, elevator, boiler, and common walkways, for both liability and physical damage–but not the inside of units.

Coverages

HO-6 policy benefits include:

  • Coverage for damage to personal property such as furniture, computer equipment and clothing
  • Fill in the gaps of the master insurance policy and cover losses under master policy deductibles
  • Personal liability coverage
  • Interior walls and floor coverings coverage
  • Coverage for improvements or upgrades (most master insurance policies only cover the original condition and value of the unit).
  • Usually has small deductible and fairly inexpensive

Under the new lending rules, an HO-6 insurance policy must provide coverage for no less than 20% of the condominium unit’s appraised value.

High Deductible Protection

Another benefit of obtaining an HO-6 policy is that in certain situations, it will provide gap coverage caused by the often high deductibles on a master insurance policy. These days, condominium associations have been cutting costs by increasing their deductibles, anywhere from $10,000 to even $50,000. What’s more, condominium documents often provide that the unit owner is responsible for losses falling below the deductible. A well-tailored HO-6 policy will protect you in this situation. Here is a good article about the tug-of-war on deductibles.

Loss Assessments

HO-6 policies can also provide coverage for assessments applied an individual unit due to a direct loss to the condominium. The loss must be a “peril” covered under the unit owner’s individual policy, not be levied by a governmental agency, and not be related to earthquake damage. A standard condo policy typically includes up to $1,000 in loss assessment coverage. Additional coverage can be covered for a nominal amount.

The HO-6 policy is a must have for every condominium owner!

If you need an HO-6 policy, please contact my good friend, Kate Kissane at Morrill Insurance in Sudbury, MA. Email: [email protected] or tel: 978-443-9912. 

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Massachusetts Real Estate Law Year In Review: Top Posts Of 2009 And Predictions For 2010

by Rich Vetstein on December 28, 2009

in Closings, Condominium Law, Electronic Closings, Fannie Mae, FHA, Foreclosure, HUD, Massachusetts Property Values, Massachusetts Real Estate Law, Mortgage Crisis, Purchase and Sale Agreements, Realtors, RESPA, Short Sales, Technology

In the spirit of the New Year, let’s look back at the top legal issues of the past year and peer into the crystal ball for a glimpse at 2010.

Top 5 Posts For 2009

#1.  The Catch-22 Impact of New Fannie Mae Condominium Regulations. In January, Fannie Mae was the first government agency to drop a big bucket of cold water on condominium lending underwriting practices which some say contributed to the condominium market meltdown. FHA and others would follow later in the year. The new guidelines had condominium developers and associations, buyers and sellers in a tizzy, as Fannie Mae imposed much tougher pre-sale requirements, condominium financial guidelines and the imposition of unit owner HO-6 insurance policies, among other requirements.

#2.  New FHA Condominium Lending Guidelines Sure To Slow Financing and Chill Sales. The Federal Housing Administration (FHA) followed Fannie’s lead in tightening condominium lending requirements. Originally proposed over the summer, FHA delayed implementation of the new guidelines until earlier in the month and watered down some of the most stringent requirements, after major lenders and community association groups complained.

#3.  There’s Nothing Standard About The Massachusetts Standard Purchase and Sale Agreement. Great to see a post about buying a new home ranking so highly. An indicator of the recovery of the Massachusetts real estate market perhaps? Check out this post for the ins and outs of the very seller friendly standard form P&S and how to level the playing field if you are a buyer.

#4.  Massachusetts Land Court Reaffirms Controversial Ibanez Decision Invalidating Thousands of Foreclosures. If you were following the foreclosure mess, you couldn’t have missed this judicial bomb dropped by Massachusetts Land Court Judge Keith Long. The so-called Ibanez ruling invalidated thousands of foreclosures across the state because the lenders did not record their paperwork up to date at the registries of deeds. Lenders have appealed the ruling, but hundreds of foreclosure titles remain unmarketable in the wake of this controversial decision. More to come in 2010.

#5.  Short Sales Get Boost From New Obama Treasury Guidelines. On December 1, the Obama administration set long-awaited guidance on a plan for mortgage companies to speed up short sales of homes and other loan modification alternatives to stem the rising tide of foreclosures. The Home Affordable Foreclosure Alternatives Program provides financial incentives and simplifies the procedures for completing short sales, a growing practice in which a lender agrees to accept the sale price of a home to pay off a mortgage even if the price falls short of the amount owed.

Honorable Mention. I would be remiss if I didn’t mention the new RESPA guidelines and the new Good Faith Estimate and HUD-1 Settlement Statement which go into effect Jan. 1, 2010.

2010 — The Year We Rebound

The Massachusetts Real Estate and Mortgage Market

All signs are pointing to a real estate rebound for the Bay State in 2010, with home and condominium sales surging over 50% from last year in November. I have definitely seen an uptick in new purchases on my end and we are preparing for a busy 2010. Along with good news from the real estate market, however, comes higher interest rates as the bond market reacts to positive news. My friend mortgage consultant Brian Cavanaugh at SmarterBorrowing.com does a good weekly mortgage market update and is presently advising borrowers to lock into current rates as he predicts rates will rise in 2010 to close to 6% for a 30 year fixed. Of course, when rates go up, buying power goes down, thereby cooling the market a bit.

Regulatory

Hopefully we’ve seen the end of increased regulation of the condominium market from the government giants. Let’s toast that they can let the market take its course with the new guidelines in effect.

Stimulus/Home Buyer Credit

As the economy continues to recover, you can probably bet that the Obama administration is going to let up on the stimulus/credit throttle for 2010. So take advantage of all the credits available now, because this is probably the last you will see of them for awhile.

Housing

On the housing front, Massachusetts builders are reportedly foregoing McMansions in favor of  the more affordable middle market of homes in the $400,000 to $600,000 price range. Finally!

Technology

Lastly, technology, the internet and social media will play an even bigger role in how realtors, lenders and real estate attorneys do business. The National Association of Realtors says that 87% of home buyers use the Internet to search for homes. I tell all my Realtor friends they must have a strong Internet presence and to take advantage of blogging, social media and Active Rain to boost their online presence.

For attorneys, in 2009 we saw the tip of the iceberg for electronic recordings and closings as well as online transaction management. Our office just set up an online transaction management system where buyers, sellers, loan officers and realtors can view the status of the loan whenever they want through a secure online portal. It’s a fantastic tool. While electronic closings are a way’s away from gaining the necessary critical mass of lender acceptance, many Massachusetts registries of deeds are now e-recording, and that will continue to rise. The next decade will certainly bring electronic closings and paperless transactions into the norm.

Well, let’s clink our glasses to a very happy, healthy and fruitful New Year!

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Final (Hopefully!) Revised FHA Condominium Lending Guidelines Issued

by Rich Vetstein on November 21, 2009

in Condominium Law, Fannie Mae, FHA, HUD, Massachusetts Real Estate Law, Mortgages

After several revisions and delays, the Federal Housing Administration (FHA) has finally issued major changes to its revised guidelines on mortgage insurance requirements for condominium projects. FHA first proposed the revisions back in June (under Mortgagee Letter 2009-19). The new guidelines are effective December 7, 2009; however, some of the requirements are phased in through January 31, 2010.

There has been a considerable amount of controversy involving HUD/FHA’s proposed requirements for obtaining FHA mortgage insurance for condominiums. The newest guideline revisions are in response to the strong reaction from condominium associations and mortgage industry representatives who saw many of the FHA requirements as counter-productive and burdensome to condominium associations and owners.

The latest guidelines are described in two separate HUD/FHA documents:

  • Mortgagee Letter 2009-46B (the revised guidelines for FHA approval of residential condominium projects)
  • Mortgagee Letter 2009-46A (temporary guidance for condominium approvals).

Under the Temporary Guidance:

  • The “Spot Loan” approval process will continue through February 1, 2010, after which it will be replaced by the new Direct Endorsement Lender Review & Approval Process (DELRAP); and
  • The 30% cap on FHA loans per condo project will be expanded to 50% until December 31, 2010. Concentrations may be increased to 100% if certain additional conditions are met. After January 1, 2011, the cap reverts back to 30%.

The highlights of the New Guidelines are as follows:

  • Condominium project approval is not required for condominiums comprised of single-family totally detached dwellings (no shared garages or any other attached buildings).
  • Until December 31, 2010, at least 30% pre-sale level must be reached before any FHA mortgage can be granted on any unit. After 12/31/10, 50% pre-sale level must be reached.
  • 50% owner occupancy rate for the entire project.
  • No more than 15% of unit owners can be delinquent (over 30 days late) on their condominium fees.
  • Capital reserve funding:  The reserve study requirement has been eliminated, along with the requirement of at least 60% of the fully funded reserves. The new requirement requires merely that at least 10% of the association’s annual budget be set aside for reserves.
  • Budget review:  Lenders must review the condominium budget to determine that the budget is adequate and: (i) includes allocations/line items to ensure sufficient funds are available to maintain and preserve all amenities and features unique to the condominium project; (ii) provides for the funding of replacement reserves for capital expenditures and deferred maintenance in an account representing at least 10% of the budget; and (iii) provides adequate funding for insurance coverage and deductibles.
  • No more than 25% of space allocated to commercial use.
  • No more than 10% of units held by a single investor.
  • The 1-year waiting period for conversion condominiums is eliminated.
  • Unit owners must obtain individual HO-6 insurance policies if the master policy doesn’t cover unit interiors.
  • Fidelity insurance must be obtained for 20+ unit projects.
  • Re-certification required every 2 years.

Transition Strategy:

  • FHA will move all currently approved condominium projects to the new approval list and FHA Connection database.
  • Projects that received approval prior to October 1, 2008, will require recertification on or before December 7, 2009.
  • Projects that received approval between October 1, 2008 and December 7, 2009, will be “grandfathered” and will have to follow the new guidelines’ recertification process (recertification required every two years).

couple-homeAnalysis:

Although the condominium association and mortgage lobby were successful in watering down some the more onerous requirements, the new revised guidelines will still represent a major change in how lenders underwrite condominium mortgages. Lenders will have to perform much more extensive due diligence on condominium projects than before.

The new guidelines will also force existing condominium associations to really get their acts together, especially with their unpaid condominium fees, budgets, insurance and capital reserve accounts. FHA mortgage programs are becoming the first choice for first time home buyers, and condominium units are particularly suitable for first timers. I have already seen situations where condominium trustees feel no obligation to comply with FHA (and Fannie Mae) guidelines in connection with a proposal sale of a unit, and it is not a good situation. Condominium trustees and association can certainly open themselves up to liability if they don’t cooperate and maintain the marketability of the units which they govern. Trustees owe unit owners a fiduciary obligation to get their associations in compliance with all new FHA/FNMA guidelines, in my opinion.

For condominium associations, the Community Associations Institute has published this helpful “Head’s Up” and FAQ.

As always, contact Richard Vetstein with any questions.

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Are You Ready For Some RESPA Reform? Part I, An Overview Of The New Regulations

by Rich Vetstein on November 17, 2009

in Closings, Condominium Law, Electronic Closings, Fannie Mae, FHA, HUD, Massachusetts Real Estate Law, RESPA, Title Insurance

New, sweeping changes regulating how lenders, closing attorneys and title companies disclose loan and closing costs are set to go into effect January 1, 2010. The new regulations are part of a long awaited reform to the 30 year old Real Estate Settlement Practices Act known as RESPA aimed at providing greater transparency and fostering better consumer choice in loan and closing costs. The changes are so significant that HUD recently took the unusual step of giving lenders a 120 day reprieve in enforcing the new regulations.

The major components of the new RESPA reform are the new and substantially revised Good Faith Estimate (GFE), in which lenders disclose loan and closing costs to borrowers, and the HUD-1 Settlement Statement, which is a detailed financial breakdown of the entire real estate transaction signed at closing.

Highlights of the new changes include:

  • Borrowers must receive a standard GFE disclosing key loan terms, including the loan’s terms; whether the interest rate is fixed or otherwise; any prepayment penalties and/or balloon payments; and total closing costs.
  • Lenders must provide borrowers with a standard origination charge for the loan which must include all points, appraisal, credit, and application fees, administrative, lender inspection, wire, and document preparation fees
  • Lenders have the option of providing borrowers with a list of approved service providers such as closing attorneys and title insurance companies.
  • A tolerance range has been specified for various categories of loan/closing costs to prevent unnecessary escalation of promised vs. actual charges.
    • Fees quoted for lender origination charge cannot change.
    • Fees for title and closing costs where the lender selects the provider or where the borrower selects the provider from the lender’s approved list cannot change by more than 10%.
    • Fees that borrowers can shop for themselves can increase (or decrease) by any amount.
  • The final page of the GFE contains worksheet-like charges to compare different loans and terms that the borrower can use to shop pricing.
  • Controversial lender payments to mortgage brokers, known as yield-spread premiums, must be disclosed in a standard manner.
  • The charges quoted on the GFE are then carried over to the HUD-1 Settlement Statement to ensure that the prescribed tolerances are met.

Here is a link to the new Good Faith Estimate (GFE) form and a link to the new HUD-1 Settlement Statement form.  The most recent FAQ from HUD (last updated 1.28.10) can be found here.

I think that overall the changes will provide consumers with greater disclosure and transparency of the myriad loan closing fees and costs in a typical real estate purchase.  It also creates an incentive for lenders to assemble a competitively priced team of preferred settlement service providers, so it can guarantee to its customers that the price of the preferred vendors’ settlement services will never increase by more than 10% at closing.  If borrowers aren’t happy with that, they are free to shop and find a better deal themselves.

I plan to do a series of upcoming posts on this important RESPA reform, highlighting the salient sections of the new GFE and HUD-1. As always, contact Richard Vetstein with any questions.

Please read my second post in this series, New RESPA Rules 2010: Disclosure of Settlement Services, Attorneys Fees and Title Insurance.

For all the posts in the RESPA series, click here.

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New Stricter FHA Condominium Lending Regulations and Guidelines Sure To Slow Financing And Chill Sales

by Rich Vetstein on October 6, 2009

in Condominium Law, Fannie Mae, FHA, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

Update: 11/10/09–THESE RULES HAVE CHANGED. Please see my post: FHA Issues Final Revised Guidelines–Spot Approvals Extended Until Feb. 1, 2010

Update: 10/26/09–The FHA Has Delayed Implementation Of New Rules Until December 7, 2009

Under revised guidelines which were to be effective October 1, 2009 but now delayed until November 2, 2009, the Federal Housing Administration (FHA) is implementing a new stricter approval process for condominiums to be eligible for FHA financing. The guidelines are very similar to the new Fannie Mae regulations issued earlier in the year. Some “highlights” of the new regulations include that all FHA approved condominium projects have at least a 50% level of owner occupancy or sell out, no more than a 15% condo fee delinquency rate and a capital reserve study, among other requirements. There is also a little known requirement for an affirmative action housing plan for new construction and conversions. The FHA guidelines will surely slow down condominium mortgage financing, and negatively impact first time home buyers’ ability to obtain FHA mortgages for condominium units.

For those who don’t know, FHA is a government program designed to help more people buy homes, and more borrowers will qualify with FHA financing than with conventional. It is a low down payment (3.5% down) program and the credit standards are much looser. The mortgage rates are typically better, as well.

To obtain a FHA mortgage on a condominium, the project must be FHA approved. Prior to these changes, there were two ways a condominium could be FHA approved: (1) full project approval, and (2) “spot” approval. Full project approval means that FHA has already done the approval on the entire condominium. Spot approvals were performed on non-FHA approved projects on a loan by loan basis, and were a way to make FHA loans available to home buyers in well run condo projects even if they haven’t gone through the full approval process.

No More Spot Approvals

Under the new guidelines, the popular spot approval process will no longer be available and will be replaced with an entirely new process called Direct Endorsement Lender Review and Approval Process (DELRA). FHA claims the DELRA process is more uniform and streamlined that the former spot loan approval process, but that remains to be seen. The good thing is that lenders will retain the ability, like the former spot approval process, to underwrite FHA loans on non-FHA approved projects, albeit with tighter guidelines.

The new regulations also limit the duration of full project approvals to two years. Thus, even approved condominiums must re-certify every 2 years.

New Project Eligibility Guidelines

Under the new project eligibility requirements, all condominiums (consisting of 2 or more units) must meet the following requirements:

  • At least 50% of the units of a project must be owner-occupied or sold to owners who intend to occupy the units. For proposed, under construction or projects still in their initial marketing phase, FHA will allow a minimum owner occupancy amount equal to 50 % of the number of presold units (the minimum pre-sale requirement of 50 percent still applies).
  • Projects must be covered by hazard and liability insurance and, when applicable, flood insurance.
  • At least 50% of the total units must be sold prior to endorsement of any mortgage on a unit. Valid pre-sales include an executed sales agreement and evidence that a lender is willing to make the loan.
  • No more than 15% of the total units can be in arrears (more than 30 days past due) of their condominium association fee payment.
  • No more than 25% of the property’s total floor area in a project can be used for commercial purposes.  The commercial portion of the project must be of a nature that is homogeneous with residential use, which is free of adverse conditions to the occupants of the individual condominium units.
  • Reserve Study – a current reserve study must be performed to assure that adequate funds are available for the funding of capital expenditures and maintenance. A current reserve study must be no more than 12 months old – if recent events or market conditions have affected the finished condition of the property that information must be included. When reviewing the reserve study, consideration must be given to items that have been replaced after the time that the reserve study was completed. The regulations fail to define what is “adequate,” however, guidance may be found in the new Fannie Mae/Freddie Mac condominium guidelines which mandate at least 10% of annual operating budget in reserves.
  • No more than 10% of the units may be owned by one investor.  This will apply to developers/builders that subsequently rent vacant and unsold units.  For two and three unit condominium projects, no single entity may own more than one unit within the project; all units, common elements, and facilities within the project must be 100% complete; and only one unit can be conveyed to non-owner occupants.
  • Rights of first refusal are permitted unless they violate discriminatory conduct under the Fair Housing Act.

Buried in the fine print is a requirement for an affirmative action-type housing plan. For both new construction and conversions, if the developer intends to market 5 or more units within the next 12 months with FHA mortgage insurance, an Affirmative Fair Housing Marketing Plan (AFHMP) or a Voluntary Affirmative Marketing Agreement (VAMA) must be in place. An affirmative fair housing marketing plan requires that the racial, socioeconomic, and ethnic composition of the condominium residents closely mirror that of the neighboring area, to the greatest extent possible. Most new condominiums don’t have these in place.

Click here for the new FHA condominium guidelines. You can look to see whether a condominium is approved on the HUD Homes & Communities website located here. Here is the FHA Condominium Mortgage webpage.

The Impact: More Work For Lenders, Condominium Associations/Managers And Attorneys

I expect FHA lenders will approach condominium association boards and managers, asking for certain information, certifications, and even legal opinions regarding compliance with FHA (and Fannie Mae) legal requirements. If a condominium is not on the FHA-approved list, or has lost its approval, condominium associations should consider applying for approval (or re-approval). Reportedly, FHA/HUD is backlogged a month or more in reviewing submitted applications. Thus, should your condominium need to be submitted for approval, keep in mind the process may take some time. Also keep in mind that the work to compile and complete the application package itself can take weeks, and require the board, its manager, and legal counsel to gather data, documents, and expert opinions required for FHA approval. The package of materials that must be submitted can vary from condominium to condominium, and often requires an updated reserve study and certain legal opinions.

Our office is well equipped to assist lenders and buyers with FHA loan compliance issues as we have recently issued opinion letters and certifications under the similar Fannie Mae condominium regulations. Contact [email protected] for more information.

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Community Associations Institute Weighs In Against New FHA and Fannie Mae Condominium Regulations

by Rich Vetstein on October 5, 2009

in Condominium Law, Fannie Mae, FHA, Mortgages

IMPORTANT UPDATE: 11/16/09:  FHA Issues Final Revised Condominium Lending Guidelines

As a follow up to my post on the new FHA condominium regulations, I received word from my friend Seth Wills at XLT Property Management, that the Community Associations Institute — the leading condominium and homeowner’s association trade group — recently sent a bulletin to its members, railing against the new FHA and Fannie Mae regulations as overly onerous and hurtful to the real estate market. CAI’s memo states:

CAI believes the new regulations would be a serious burden for condominium associations, and lead to market confusion that could hinder the housing and economic recovery. Under the proposed regulations, all condominiums previously approved for FHA financing would have to be reapproved or FHA financing would not be available. Also, instead of FHA staff reviewing and underwriting condominium projects, FHA would follow Fannie Mae and Freddie Mac by allowing lenders to review and underwrite these projects and certify compliance to FHA. This is the same system that resulted in the current mortgage default crisis. Furthermore, condominium boards (and management) would be asked to provide legal documents, contracts, plans, insurance coverage, pre-sale and owner occupancy percentages and other documentation to lenders performing the underwriting reviews. Condominium associations would also be required to compile, maintain and provide the necessary documentation and information requiring them to develop and implement new procedures — adding significantly to the workload of community managers and condominium boards.

CAI’s position is not surprising given the spat of recent, increased government intervention and regulation affecting condominium and HOA governance.  CAI makes a good point with respect to the agencies’ failure to coordinate their regulatory policies:

CAI believes it is essential that these agencies coordinate their actions. These agencies are all essential to mortgage financing and the housing market. Different requirements create confusion for lenders, borrowers, associations and the general public. Such confusion can only slow the recovery of the housing market and the economy in general.

The FHA regulations are set to go into effect November 2.  We’ll see if CAI’s promised lobbying push this next month has any effect.

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The Catch-22 Impact Of New Fannie Mae (FNMA) Condominium Lending Regulations

by Rich Vetstein on July 1, 2009

in Condominium Law, Fannie Mae, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

Recent Fannie Mae (FNMA) condominium lending regulations are beginning to live up to the hype as having an onerous impact on condominium sales and project development. The changes, made in January 2009, were part of an effort by mortgage giants Fannie Mae and Freddie Mac to limit risky lending in a segment of the housing market particularly hard hit by foreclosures in recent years.

Here is a brief overview of the Fannie Mae condo guideline changes:

  • For new construction and newly converted condominium developments, 70% of the units must be pre-sold (closed or under contract). This guideline is being increased from 51%.  This is the real Catch-22.  Fannie Mae won’t approve condominium mortgages unless 70% of the units are sold, but a developer cannot sell 70% of the units without buyers being able to obtain conventional Fannie Mae compliant mortgages. Buyers who run into problems here are being forced to get loans from small local banks who hold their own mortgages and are not bound by the FNMA guidelines.
  • No more than 15% of condominium units within a single project can be more than 30 days delinquent on condo fees. This is an existing guideline that is now being applied to new condominium projects. The requirement was also changed from being 15% of the total fee payments to 15% of total units.
  • Fidelity insurance will be required for condominiums with 20 or more units, ensuring that homeowner association funds are protected. Presently, this requirement applies to new projects and is now being extended to include established condominiums.
  • Borrowers must now obtain an HO-6 condominium unit owners insurance policy unless the condominium master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condominium owners policy, known as an HO-6 policy, typically covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider. Click here for a more extensive post on HO-6 policies.
  • No more than 10% of a project can be owned by a single entity. Apparently, this was to keep the so-called “vulture buyers” from taking over project.
  • No more than 20% of a project can consist of non-residential space. The new guidelines therefore severely impact most mixed commercial-residential use projects, a highly popular development scheme.
  • The condominium/homeowners association must have at least 10% of its budgeted income designated in a capital reserve fund for replacement reserves and adequate funds budgeted for the insurance deductible. Many older condominium associations keep woefully inadequate reserves and operating budgets, so they are non-compliant.
  • No pending litigation involving the structural soundness, safety or habitability of the condominium project. Fannie Mae underwriters will reject financing if the condominium association is involved in litigation over the construction of the project. I’ve written about this more extensively here. Borrowers may ask for a waiver if they can establish adequate insurance coverage for the litigation or otherwise little or no risk of loss to the association.
  • Fannie Mae and Freddie Mac have also boosted fees on mortgages for condominium units. Buyers without a minimum 25% down payment have to pay closing-cost fees equal to 0.75% of their loan, regardless of their credit score, under new rules that took effect in April. Fannie Mae has said it will drop that fee in August for cooperative apartments and detached condos.

According to a Fannie Mae, the guidelines can be modified for condominium projects on a case-by-case basis.  Therefore, these guidelines may not apply to all condo projects.

Click here for the guidelines.

What’s the impact of the changes?FNMA condominium guidelines

Certainly, the revised guidelines are negatively affecting condominium buyers’ ability to obtain conventional loans for either a new or established condominium if the project does not conform. Most notably, the changes are dramatically affecting new developments, especially in hard hit areas such as Florida and California.

Fannie Mae has already approved a number of projects. Click here for the full list of FNMA approved projects.

Through discussions with some fellow Massachusetts real estate professionals, the impact here in the Bay State is not as bad as some of the harder hit states, but it’s proving to be a major thorn in many transactions. Real estate attorneys on both sides of the table are working hard to get existing condominium developments in compliance with the new regulations.

Rep. Barney Frank (D-Mass.), who ironically spent the last year lambasting Fannie Mae for its questionable lending practices, is now calling for Fannie Mae to relax these guidelines. We’ll see what happens in D.C., and keep you posted on any changes coming down the pipeline.

Update:  Since I posted this article, I’ve been retained several times to issue attorney opinion letters certifying to a lender that a particular condominium project is in compliance with the new FNMA regulations. If you are in need of such an opinion letter, please contact Richard Vetstein at [email protected].

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