Fannie Mae yesterday informed the banking industry that it would raise the nationwide pre-sale requirements for new co-ops and condominium buildings to 70 percent starting March 1, one of several changes designed to reduce the amount of risky consumer loans in the market, according to documents obtained by The Real Deal.
The Washington-based mortgage agency said in a letter it would update several other regulations, including the following:
1. No more than 20 percent of the building’s total square footage
can be used for non-residential use, for example, retail, commercial or
2. No more than 10 percent of the units can be owned by one individual, corporation, investor group or partnership.
3. Buildings with more than 20 units must have fidelity bond insurance,
which protects the building in case an employee steals money or commits
some other crime.
new 70 percent pre-sale requirement is much higher than the current 51
percent, which allows Fannie Mae and Freddie Mac to guarantee
conforming bank loans of up to $417,000. The Economic Stimulus Act of
2008 allowed Fannie and Freddie to guarantee loans of up to $729,750 in
high cost areas like New York and up to $625,500 for 2009. Lenders have
not seen any new guidelines from Freddie and its officials were not
immediately available for comment.
The new guidelines do not automatically disqualify loans approved under the current guidelines, but would subject the loans to manual review, which calls for much tighter scrutiny of the building and the buyer. Lenders have been using an automated system to assess loan risk, and the new guidelines seem to acknowledge that risky loans are not being properly screened.
“We saw that on the appraisal side too, where lenders would basically punch in an address and it would generate a risk assessment and that would be the basis of the loan,” said Jonathan Miller, president of appraisal firm Miller Samuel. “Clearly they’re seeing something significant that would cause them to change their standards.”
Debra Shultz, director and senior mortgage consultant at Manhattan Mortgage, said she doesn’t “really think [the new guidelines are] going to have a huge effect in Manhattan because most of the buyers are highly qualified.”
She said, however, that some “troubled” buildings could be impacted by the new requirements because of an increased level of scrutiny.The Real Deal previously reported that Citibank and other lenders have refused to lend at Manhattan House because it didn’t meet the 51 percent threshold.
Sales at a co-op building at 101 West 23rd Street were suspended earlier this year, as banks refused to underwrite loans because of a ground lease.
Many banks are cautious about lending in Battery Park City buildings, as many of those sit on ground leases. Banks now often refuse to lend in condos and co-ops that sit on land leases because of the increased risk to buyers. Under the new rules, these kinds of deals could face more hurdles.
John Reinhardt, CEO at Fillmore Real Estate, the largest real estate brokerage in Brooklyn, said the new rules will make it nearly impossible for buyers to close on new apartments.
“A lot of them are sitting and waiting, but they can’t get financing,” he said.
Sam Heskel, executive vice president of Brooklyn-based appraisal firm HMS Associates, notes that many condos have already been forced to stop selling because the buyers can’t get bank financing.
“The way I see it right now most of the [condo] projects are being rented and this is going to make it more difficult,” said Heskel. “It’s not making it easier for the developer or the buyer.”
Real estate attorney Sal Strazzullo said that many developers may have to become private mortgage holders, where they work with the construction lender to offer financing to new buyers.
“They’re going to have to work something out with the banks to convert the construction loans to assign mortgages to each individual person,” said Strazzullo “Instead of paying the bank off at every portion of the sale, the owner converts the loan to a mortgage of the buyer.”
Real estate attorney Adam Leitman Bailey, who has advised buyers at Manhattan House and other condo projects, said the new guidelines could force a significant numbers of buyers to just throw in the towel.
“If that does occur, the comparison would be a snowstorm in the summer — many buyers will walk away from their deposits,” he said.