Rates stay flat, Fannie Mae, Freddie Mac restrict loans on condos

For the second straight week, the benchmark 30-year, fixed-rate mortgage is 5.23 percent, according to the Bankrate.com national survey of large lenders.

A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.41 discount and origination points.

One year ago, the mortgage index was 6.16 percent; four weeks ago, it was 5.13 percent. The benchmark 15-year, fixed-rate mortgage slipped 3 basis points, to 4.73 percent. The benchmark 5/1 adjustable-rate mortgage dropped 6 basis points, to 5.05 percent.

Condo woes

Owners and developers desperate to sell new condo units have hit a fresh roadblock, courtesy of mortgage giants Fannie Mae and Freddie Mac.

On March 1, Fannie Mae stopped guaranteeing mortgages in new or newly converted condo developments in which fewer than 70 percent of units have been sold or are under contract. Fannie's previous rules set the cutoff at 51 percent. Freddie Mac recently sent a bulletin to sellers and servicers announcing plans to adopt similar restrictions beginning July 1.

Realtors and other mortgage professionals report a slowdown in condo loan activity in the two months that Fannie's "presale guidelines" have been in effect.

"The new rules have made getting loans more difficult," says Karen Monsour, a Realtor with Coldwell Banker Fort Lauderdale Beach in Florida. "In fact, one of my customers was just denied a loan due to the vacancy rate in a complex."

Activity also may be falling in other markets. Brian Peart, president of Nexus Financial Group in Atlanta, says it is "extremely difficult" to get a condo mortgage in his market.

Chris Sipe, senior mortgage consultant at Mason Dixon Funding in Frederick, Md., says it's "nearly impossible," to secure condo financing.

The Fannie changes are especially unwelcome in cities such as Las Vegas, where condo values have plunged due to a combination of massive oversupply and high foreclosure rates.

"Condos that rent for $800 to $900 a month can be bought for as little as $30,000 to $45,000," says Mark Madsen, a mortgage consultant with Raintree Mortgage in Las Vegas. "These are properties that were selling around $300,000 a few years ago."

Older communities not immune

Fannie Mae's presale guidelines target new developments, typically defined as projects where the developer has not yet turned over the homeowners association to the owners.

However, existing communities are not immune. Older Fannie rules in place for years have started to hamper mortgage activity in previously stable communities now struggling as the condo market sags.

For the past couple of years, Fannie has refused to guarantee mortgages for purchase in existing condo communities where 15 percent or more of owners are delinquent on their association fees by at least 30 days.

Such delinquencies have become epidemic in complexes with many foreclosures.

"The 15 percent HOA delinquency requirement now applies to both new and existing condo projects," says Fannie Mae spokeswoman Amy Bonitatibus. "Previously, it only applied to existing condo projects."

In addition, Fannie does not guarantee loans in new or existing communities where more than 10 percent of units are owned by a single entity, or where more than 20 percent of the total space in a project is used for nonresidential purposes.

Bonitatibus says Fannie's restrictions -- including the new presale guidelines -- help the company remain active in the condo market while also acknowledging ongoing market risks.

"All of our requirements are intended to protect buyers from investing in projects that have a higher risk of failure," Bonitatibus says.

Fannie has left some wiggle room in its presale rules. Developers who don't meet the 70 percent threshold can ask Fannie to waive the restrictions in certain circumstances.

Fannie considers granting such requests when it appears a new community "still has a strong chance of success." Around 90 exemptions have been granted to date, according to Bonitatibus.

Freddie Mac's new July 1 guidelines adopt Fannie's restrictions wholesale.