Coakley Expects Fed’s Compliance with New Loan Modification Law
Attorney General Martha Coakley is picking a very public fight with federal mortgage giants, Fannie Mae and Freddie Mac, in the wake of the new Massachusetts Foreclosure Prevention Act passed earlier in August. The new law requires that lenders first explore loan modifications before starting foreclosure proceedings.Fannie and Freddie control approximately 60% of all U.S. residential mortgages.
In a letter broadcast to the press yesterday, she demands that “Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our Commonwealth,” Coakley said. Stefanie Johnson, a spokeswoman for the Federal Housing Finance Agency, said, “We are reviewing the letter and will respond soon.”
The fact that AG Coakley had to write the letter begs the question. Will Fannie and Freddie comply with the new Massachusetts foreclosure law? Maybe not, if past performance is any indicator of future results.
The Federal Housing Finance Agent (FHFA), the federal regulator overseeing Fannie and Freddie, has been acting like some sort of federal rogue agency of late. Last month, the agency publicly rejected the new Obama principal reduction plan, to the chagrin of Treasury Secretary Tim Geither. And in June, it came up with a method to skirt the new tough foreclosure law passed in Hawaii. It seems that the sole concern of FHFA is to get foreclosures completed and REO properties sold off as quickly as humanly possible, homeowners be damned.
If Fannie and Freddie blow off Coakley, this will seriously dilute the new Foreclosure Act. We will monitor the situation as always.
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.
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].
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With 25 years in practice, he was voted a "Super Lawyer," a "Top Lawyer" by Boston Magazine and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney with an expertise in foreclosure related issues. You can contact him at [email protected].
