Mortgage Finance Blog

Attention Condo Owners & Realtors:

It has been a rough time for bankers to realize profits in the real estate market and worse results have come from the condo market. Although, we have seen a lot of luxury condos hit the market over the last decade, they are simply not turning out to be a good investment. What has taken place? Well, the Federal Housing Administration (FHA) has issued a mortgagee letter (2009-19) which states that they will place some stringent approval guidelines to accept condo complexes. In order for a bank to fund on a condo unit for a customer, it must be approved by FHA and pass the standards required for funding.
According to the the letter, all condominium project approvals will be invalid within the next month. It does, however, allow projects that were approved on or after October 1st, 2008. This pretty much wipes out the majority of approved condominium projects across the country. Even if your particular condo is approved, I would not be too comfortable since all of the approvals will need to be renewed every two years. This, effectively, stops FHA lending on condos over the next few years. There is very little chance that the Department of Housing and Urban Development (HUD) will have the work force to re-approve all condos within two years. Is the writing on the wall? No one wants to fund on condos anymore!
As for conventional financing, we have seen the loan-to-value ratios decrease on loan guidelines over the last few years. This means that the potential buyer has to have more of a down payment in order to secure financing. Additionally, mortgage insurance companies are refusing to insure loans placed on condos, which leaves all buyers in a position to put at least 20% down. Its simply getting tougher to buy or refinance a condo.
What does this mean to the typical buyer, owner, or Realtor? In general, investors always have to think about the exit strategy before entering into an investment. This new rule which takes effect on November 2, 2009 will effectively decrease your chances of resale and close-off your exit. If conventional guidelines follow suit, then your chances of resell will be only as a "seller carry-back" or "full cash buyer." As a Realtor, it is essential that we advise potential buyers of the possibility of owning the investment until, let’s just say, “forever.” Its tough to get rid of an asset that can’t be bought by all possible financial means.
So, if you would love a condo – go get one and be happy to sit on the investment for a very long time. If you want to assure yourself of some type of exit strategy, then pick a single family residential home and rest assured that your exit strategy will be better than that of condo.

Your trusted mortgage professional,

Diego L. Quintero

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