A Co-op and Condo Conundrum
Sometimes the rest of the country seems about as far away from New York City as Mars. Yes, New York City is working its way through the national residential real estate recession, but it’s more of recession-lite than supersized (think Phoenix or Vegas). That being said, the pain being inflicted by Fannie Mae’s tighter lending requirements, applicable to co-ops and condos, is finally catching up to New York with unpleasant surprises.
The Bumps in the Road
Over the past year, there have been a number of articles outlining the stricter lending guidelines imposed by Fannie Mae, resulting in a number of co-ops and condos either not qualifying for Fannie Mae approval or having that approval lapse. Without Fannie Mae approval, even if the loan is non-conforming (such is the case with jumbo loans), many lenders will not provide financing in a building that does not meet the intensified guidelines. Owner occupancy thresholds, insurance compliance, higher percentage contract deposits, sponsor litigation and a variety of other issues are on track to slow down residential lending at a time when such financing is desperately needed. As I recently experienced, the “maintenance reserve” requirement is particularly troublesome.
An Often Ignored Budget Line Item
As pointed out in an article by Lynnley Browning in the Times from January of this year, Fannie Mae requires buildings to maintain a reserve equal to ten percent of operating expenses in order for the project to be “approved”. So even though the buyer is qualified and the appraisal requirements are satisfied, if the building does not comply with the maintenance reserve threshold, lenders may not finance in that building. All too often, lenders raise this issue at the end of the underwriting process and not at the beginning. For those interested, Fannie Mae does provide a current list of approved buildings in New York.
When the Condo Needs a Waiver
It is possible for a project to obtain a waiver from the maintenance reserve requirement, depending upon the “nature and circumstances”, so says a Fannie Mae spokesperson quoted in Browning’s article. In fact, 1700 waivers were approved for New York buildings by Fannie Mae in 2010. With so many co-ops and condos operating with slim reserves, however, lending in buildings with marginal finances will become more and more of a challenge, and in some cases, will not impossible. Once again, additional headwind slowing down the real estate recovery.
Another Query for the Due Diligence List
Whether a building is Fannie Mae approved is a question brokers and buyers should be asking before the contract gets signed. Even in “all cash” transactions, a buyer should want to know whether a future sale could be impacted by a building’s failure to keep Fannie Mae happy. As the regulation of consumer lending continues to impose greater limitations on the availability of financing, apartments in co-ops and condos without Fannie Mae approval will continue to experience roadblocks on the road to the closing table.