Stunning New Underwriting Guidelines to Affect Condo Ownership

By
Real Estate Agent with RE/MAX Associates CA BRE# 01048160

For owners of condominiums who want to sell or refinance, some stunning changes and challenges lie ahead.  In market areas across the entire country, things are looking to get more difficult for condominium owners to sell or refinance a condominium.

Announced effective May 1, 2008, if you own a condominium in a declining area, a major private mortgage insurance, AIG, will no longer write coverage.

Their decision is supposedly not going to be affected by the applicants standing on the application. This is not about the applicants credit score or assets. It is about whether the condominium subdivision where the home is located is situated in a declining market area. Other insurers may continue to write that insurance, but may also demand higher minimum requirements for down payments for entry-level buyers.  

In a corresponding change, Fannie Mae and Freddie Mac have rolled out new tougher underwriting guidelines for lenders who write loans for condominiums. This involves the level of due diligence that will be required to be performed upfront by the loan officer. What must be reconciled are the subdivisions characteristics and other "compensating factors" such as its legal documentation, adequacy of association operating budgets, percentage of non-owner occupants, percentage of late payers of the unit owners and the amount of reserves and what they are allocated to.

This type of information has usually been supplied here in Southern California by what is known as a Condo Cert. The difference now is that the lender must warrant its accuracy.

What may be onerous is the amount of time and research that it requires and then that the lender must take responsibility for its accuracy. I suspect there may be a conflict when the condominium subdivision owner realizes he can't sell his home because of an association's budget or under designated reserves.

The amount of staff time alone needed to accomplish this is going to make it more difficult for many lenders to do the loan and perhaps even impossible to do the loan if they don't have the staff to accomplish this requirement. My sense of this takes me back to an even more important question. Will these changes have an even greater effect on condominium values? Condominium associations especially those in declining markets may need to revisit costs, budgets and their reserves in overcoming these new challenges.

All these are changes are under the guise of protecting the borrower and better managing the credit risk in the marketplace. But what about homeowners who already own condominiums? If loans are going to get so difficult to administer as to discourage possible new homeownership, how will the current owners protect their homes value in this already declining market?

 

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Show All Comments
Rainer
14,969
Terri Habecker
AIG, Allied, Fireman's Fund, CNA, Travelers,The Hartford, Pr - Dana Point, CA
Life Matters & So Does Your Insurance Co

William, I am an Insurance Agent. There might be a few possible remedies for the owners. One, is loss Assessment Coverage. If a sudden occurance causing the Association to bill all owners to replace plumbing or roofing for example. Loss Assessment coverage will pay at offered increments from 10,000 to 50,000 depending on the Ins. Company.  The coverage is extremely cheap for Landlord, Townhome or Condo owners. There is also Insurance available for Loss of Value coverage protecting the owner and lender.

I encourage owners to get Earthquake and Flood Insurance and let them know this is also available coverage for Tenants to add to their Renter policy. Many HOA's have discontinued Flood and Earthquake, it's valuable for an owner or piotential owner to know what is in an HOA's reserves before purchasing and insuring their property.

When I write any policy, I remind owners that the age of the building and Systems, not the Paint and pretty flowers planted are the actual risks when purchasing their new Condo or Townhome. Depending on the age of the building, Backup sewer and drain is a very needed emergency coverage if the Street Sewer system causes a disasterous back-up. The sewers are only covered  by the City to the curb. This can even occur when brand new plumbing is attached to an older sewer supply. I have seen this happen and it's not pretty.

Often a condo or townhome is purchased as a retirement home. Seniors need to be made aware of all potential hazards, including inadequet Liability Insurance. It doesn't go with the size or amt. of the home. It needs to be enough to keep them from having to risk losing their prioperty or go back to work to pay off judgements and debt.

I have a property I insured in Down Town San Diego in the Gaslight District in the Samuel Lofts. All of the systems have been replaced in 2005. Taking an Old building and renewing it's Luster in such a grand style is an awesome thing. There are many many condos that have emerged in the San Diego Market, are the lenders shying away from Condos?

 I know with the Insurance Companies, General Contractors are not covered by their General Liability Insurance for Condos. The Condo Risk is extremely high and there is Insurance available for General Contractors at an extremely high premium to work on Condos.

I have advice for both sides. For the Contractor, build the proper Insurance into their bid and for the Lender (I've seen some white faces here) Make sure the Contractors show proof of Coveraqe for Condo work. The GL excludes Condos and if there is a problem with a defect down the road, For the Lender, Insurance Company  and the Owners, this can be futile and costly. Providing a Dec page only to the Developer and Lender does not show full disclosure of the Contractors Policy. Contractors need to show proof with the entire policy to the Lender.The loss from Contractors not producing and buying the correct coverage for the risk they are building is a direct cause for AIG and other companies no longer insuring the Condos. AIG is one of few A+ Companies that insure Class B Licenses. The Contractor is disclosed that they are excluded from working on Condos right in the policy. The reason is the risk of not one owner, but many, sometimes 100's sueing an Insurance Company for The Contractor. For every person who frauds the Insurance Company, others pay dearly for it. If all of the risks were properly covered, the loss wouldn't impact the Insurance Company to resolve the issue by no longer insuring the risk.

Many Lenders have requirements for minimun Insurance Coverage and Maximum deductibles allowed on their Loans.  Requiring additional coverages that I listed above has very little monetery impact and further protects the Owners and the Lender in the event of a loss. With any new change, there might be room for exceptions. FYI and thank you very much for bringing this to everyone's attention.

Terri 

May 01, 2008 03:45 PM #42
Rainer
14,259
Geoff Scowcroft
Coldwell Banker - Studio City, CA

This will make it even more difficult for condo owners who were hit at the start of the decline. This sounds like an opportunity for a mortgage broker to focus on creating solutions for a troubled niche market.

One issue that we have been watching for our buyers is the number of foreclosures or delinquencies that have been happening in a complex. When a unit is delinquent the HOA fee is normally also missed. The association's financials can be badly hit when a number of units go into foreclosure. While the HOA fees are covered after a foreclosure happens, the bank does not cover the missed HOA payments.

May 01, 2008 03:59 PM #43
Rainer
14,969
Terri Habecker
AIG, Allied, Fireman's Fund, CNA, Travelers,The Hartford, Pr - Dana Point, CA
Life Matters & So Does Your Insurance Co
Geoff, it sounds simple doesn't it? My Husband is a Broker and on a few HOA Boards for his client owning over half of the units. The other, many elderly owners are facing extremely difficult times, with mortgages paid and no money for required City Repairs on the buildings. The Mortgage Brokers he has asked regarding this said it is too difficult and time consumng to work on these with other more lucritive projects on their desks.
May 01, 2008 04:15 PM #44
Rainmaker
334,601
Ann Cummings
RE/MAX By The Bay - NH and Maine - Portsmouth, NH
Portsmouth NH Homes - Service With a Smile!

Hi William - I'm not sure I want to say thanks for making us aware of this..... but I will.  I had not heard this, and I'm not sure how big a role AIG plays here in my market. 

I sell a lot of condos, and this kind of news makes me sick to my stomach.  As someone said above me, '..and the hits just keep on coming.'......

Ann

May 01, 2008 06:01 PM #45
Rainer
25,403
Greg Adelman
Midwest Home Center - Saint Croix Falls, WI
Thanks for the info and post.  This is a changing and frustating market but it offers us all a big opportunity. 
May 01, 2008 09:13 PM #46
Rainer
122,017
Christy Powers
Keller Williams Coastal Area Partners - Pooler, GA
Pooler, Savannah Real Estate Agent
Wow, that's not good at all. I don't get it. They are making things even harder. Why?
May 01, 2008 09:56 PM #47
Ambassador
600,124
Roland Woodworth
Keller Williams Realty - Clarksville, TN
Short Sale and Foreclosure Resource- SFR - Clarksv

William: This is something else... What are they going to come up with next

 

May 01, 2008 09:59 PM #48
Rainer
122,206
Pam Winterbauer
Pam Winterbauer Real Estate - San Ramon, CA
"Providing Blue Ribbon Service"
William......thanks for the post.  I heard a rumbling ab out this earlier in the week.
May 01, 2008 10:52 PM #49
Rainmaker
398,783
Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs
They will change their minds sooner than later after the damage has been done. They know nothing about local markets and the forces at work. They should have thought about this issue 4-5 years ago and not now. Much like Ethanol and the consquences that no one thought about.  
May 01, 2008 11:02 PM #50
Rainmaker
291,863
Kathy McGraw
CELLing Realty - White Water, CA
Riverside County CA Real Estate
Everything in my area has been labeled a declining market.......this is good info to know, although I wished it wasn't true.
May 02, 2008 12:26 AM #51
Ambassador
1,279,891
William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Everyone, I have been home today with one of the worst flu/colds I have had in a very long time. I will get to commenting tomorrow. The day has been mostly devoted to sleep. It seems to have a worked as I am feeling 25% better. Maybe by morning more improvement. I had the flu all of last week but worked through it and right after I posted this last post, it hit like a ton of bricks again.

Anyway , thank you all for the great comments and I will try my best to get all of you responses tomorrow . Thank you again.

Sincerely,
William

May 02, 2008 03:04 AM #52
Rainer
320,761
Chip Jefferson
Gibbs Realty and Auction Company - Columbia, SC
The hits just keep on coming. Its getting to be a level on it now I thought. Declining markets are the main problem for MI. Thank goodness Im not in one!
May 02, 2008 08:14 AM #57
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Peter- I think your thoughts make perfect sense. Thanks for sharing your insights hereHi Susie- An interesting parallel

Russ- Good information, Russ. I am sure that must be true, other places as well.

Dear Missy- I hadn't looked on Trulia Voices, but I will. If this becomes more noticeable in an election year, I wonder how they intend to "Un-Ring" the bell.

Hi Neal- I would say it is similar, but taken with what you mentioned about FHA, add in these changes on conforming loans, and then tell me if this is going to affect resale values? That in turn may affect the ability to convey ( sell) to new buyers. When someone wants to purchase a condo-what do we say in the way of disclosure about what we see happening?

Hello Cindy- All the best! I am sure this will only affect areas of the market currently designated as" declining market" areas.

 

 

May 02, 2008 10:04 AM #58
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Renee- Double whammy is right. I wonder what the owners think about builders and realtors about now. At least it defect litigation will settle out.

Good Morning Cynthia- It must appear that way. I am sure that wasn't the intent, right? Right? Right?

Hi Lenn- I think FHA might well become the standard for most condominiums. What rules will have to come in to play to keep the owner occupancy standards as being eligible may need to be seriously revised. Do you think 50 % is reasonable?

Hello Dawn- Great analogy. Well said.

Hi Mike- I worry most about the longer-term and if buyers will ultimately realize that the factors may be working against him either to buy condos now, or to sell them later.

Richard- You are welcome. Stay tuned, I am sure this will not be the last word on the subject.

Hello Svetlana- I don't know about forever, but for the shorter term, things don't look too accommodating. Exotic experience is an interesting way to put it.lol

Hi Lenn - Maybe the issue of owner occupancy ratio needs to be re-thought out. Perhaps NAR needs to tackle this. They can be pretty persuasive.

May 02, 2008 10:17 AM #59
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Colleen- That will be interesting, especially how they go about the "guarantee" part.

Hi Joan- that's a good question? I believe the standard is 10% of the budget. At this time it is not a regulation, is a guideline? I suppose it becomes a regulation once it is acted upon.

Rob- You are welcome. Thanks for dropping by.

Hello Teri- I suspect, that is going to be an issue everywhere that there is a "declining market" area. I do think there are going to be some very disappointed condo homeowners out there.

Rhonda- I don't think many lenders see this as "good news" however. More work, less pay and more liability. That is not a prescription for " good news".

Hi Valerie- Good News and Back to Basics. Tell that to the many condo owners ( past clients ) you sold to over the years and see if they feel that way. It could be a better standard in the longer term, but there are certainly going to be a lot of home current condo homeowners that might not share in the "glee".

Michelle- Very interesting. As an appraiser, have you ever been asked to secure a budget before? The lender at least would have a vested interest in procuring it, but an appraiser? This gets even more interesting. Thank you so much for sharing this.

May 02, 2008 10:50 AM #60
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Hi Paul -I really don't see this as "lenders running scared". The guidelines put an even greater responsibility on them. The lenders don't set up the guidelines, at the least as far as I have ever understood. We tend to lump everyone together, and clearly here at least, differentiations need to be made. It is always great to have your insight.

Hello Michael- Increasing management fees? I would not guess that these new guidelines would cause that. You do bring some great new information forward about management company fees for document's and transfers however. Perhaps the CCI, Covenants Compliance Inspection will be a new lender fee instead of a management transfer fee?

Hi Sharon- The disclosure to the buyers is a probable necessity. I wonder though, who is going to tell the current homeowners? This tougher news that selling their condos may just be getting a bit more difficult.

Hey Jason- Knee-Jerk is " today". Everything seems to be that way. Even those that would wish to protect the consumer, but lenders, the REALTORS are not able to justly weigh the facts and come to a clear conclusion.

Terri- Thank you for this great information. This certainly took you some time to compose and would make a great post all in and of itself. Thank you again. Very informative and I will spend an equal measure of time to learn the components of your insight is presented.

Geoff- Great information. Thanks for the reminder about these missed HOA payments. They also seem to be having an impact on some associations and why this issue was included in what the lenders needed to discover and certify.

Hello Ann- We will get through this and it seems to be an overreaction by Fannie and Freddie and others. It will in time, stabilize I am sure. I just have to believe this. In the interim, we can only do our best. We can greatly more empower our consumers by being current with new information.

Greg- Everything in life, good or bad, is an opportunity for someone. My concern is not so much focused on future buyers, but on current owners. If the effect of this causes them more financial loss, that is wrong. ( Even if someone else can seize it as an opportunity ).

May 02, 2008 11:31 AM #61
Rainer
36,005
Jason & Deanna
Breckenridge, CO

More regulation and paperwork is never a good thing. I think this could make small loan companies flee the marketplace. Less lending options usually mean higher costs for the consumer.

May 02, 2008 11:36 AM #62
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE

Christy- it's perhaps an overreaction to the market in hopes of stemming future losses.

Roland- good question. What we could all guess is that there will be more !

Pam- RUMBLING! Now that is the word I should have used in the post! Thank you for dropping by and sharing a great word.

Hello Eric- you make another great analogy. Stay tuned, it will get interesting when the real impact of this hits, and we will see if it changes for the better?

Hello Kathy- I wish it weren't either. Maybe it will not be as onerous as it sounds? Then again..............

Hi Laura- I empathize with the insurers as well. If they don't make a profit they can't pay off the clients. Catch 22

Hello Jason and Deanna- Thanks for dropping by. I suspect you are very correct. And your final analysis, is also the usual result. Pay more- get less!

May 02, 2008 11:56 AM #63
Rainer
14,969
Terri Habecker
AIG, Allied, Fireman's Fund, CNA, Travelers,The Hartford, Pr - Dana Point, CA
Life Matters & So Does Your Insurance Co

William,

 Travelers, Allied and Farmers does cover Condominium Insurance for Owners. AIG is very expensive, perhaps they are just getting out of that market.

May 02, 2008 03:54 PM #64
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William Johnson
RE/MAX Associates - San Diego, CA
San Diego Real Estate Voice, GRI CRS e-Pro CDPE
Thanks for the information on these insurers, Terri. I don't think AIG is getting out of the market but they are making it clear that they do not want to underwrite insurance for lenders loans on condominiums in a designated "declining market" areas.
May 02, 2008 04:10 PM #65
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