©TeddyBear[Picnic] - freedigitalphotos

©TeddyBear[Picnic] – freedigitalphotos

Because both government agencies of Fannie Mae and Freddie Mac are dealing with such an unprecedented level of foreclosures, they are tightening their lending practices in hopes of cleaning up balance sheets.  Fannie Mae has recently added tougher lending guidelines making it more difficult for developers to sell units at new construction projects.

Fannie Mae is government-sponsored mortgage company that guaranteed thousands of home loans during the real estate boom between 2001-2005.  Now they have stopped guaranteeing mortgages in condominium buildings where less than 70% of units have been sold which is an increase from originally 51%.  Fannie Mae will also prohibit lending for sales in buildings that have 15% of current owners who are delinquent on association dues or where more than 10% of units sold are owned by a single-entity.  This is in hopes of limiting the amount of lending in broken condo development projects, and thus limiting the amount of collateral it exchanges for home loans in buildings with high levels of default and foreclosure.

This policy came into effect as of March 1st and most lenders have started to initiate Fannie Mae’s tighter lending standards.  The goal of the program is intended to protect borrowers from buying condominiums in projects that have a high risk of default or foreclosure.  New construction developers are able to petition Fannie Mae for an exemption from the rule and thus far more than 50 exceptions have been granted.

Fannie and Freddie are also beginning to require increased fees for condo buyers looking for financing through the two government mortgage giants.  Buyers will be required to purchase with at least a 25% down payment otherwise they will have to pay fees equal to .75% of the agreed upon loan amount.

These new programs come in time for thousands of new construction units hitting the market in the next 12 months.  There is still a flood of new supply coming to market in most regions, especially urban areas with a continuing supply of new construction condominiums.  The United States according to recent census finished 2008 with a supply of condos large enough to absorb 14 months of outstanding demand – which is the highest level since the National Association of Realtors began counting in 1999.

Many new construction project developers are hoping their construction lenders can provide financing packages to offer to perspective buyers as Fannie tightens its standards.  Many projects are offering rent-to-own purchases.  Unfortunately many projects have a majority of unsold units and for borrowers it becomes harder to get a sale financed becoming a self-fulfilling prophecy.  More and more projects should continue to struggle as Fannie Mae tightens its regulations.  Ultimately these government agencies would like to be able to lend more freely, but until many foreclosure and defaults are worked out through the natural course of the market, they will continue to view condo sales very rigidly.

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