(Originally published February 1, 2010.)
Don’t look now, but buying or refinancing a condo or a coop just got harder.
Over the past two years, Fannie Mae and Freddie Mac suffered huge financial losses, in part, due to non-performing condo and coop loans. (FNMA and FHLMC are the industry’s two largest purchasers of mortgages from lenders.) The circumstances surrounding these defaults were reviewed. Although many defaults were caused by the homeowner’s own circumstances (a job loss, for example), many were traced to causes beyond the borrower’s control, such as:
- Management companies skimming maintenance fees
- Large-scale theft of funds by management companies.
- Large percentages of owners defaulting on maintenance fees.
- Sponsors defaulting on maintenance fees.
- Associations not having enough funds on hand to meet the deductibles of their insurance policy.
After careful analysis, Fannie and Freddie have updated their requirements in order to prevent such problems in the future. To insure that projects remain healthy and individual units remain solid investments, Fannie and Freddie have:
- Raised the required Master Insurance coverage.
- Raised the required Fidelity Bond Insurance coverage.
- Now require that specific language be added to the Fidelity Bond’s “crime” rider.
- Now require that either the Master Insurance include an HO6 rider, or the owner obtain their own HO6 policy.
- Increased the amount of cash reserves that condos and coops must maintain.
Lenders are reviewing condo and coop properties with a fine-toothed comb. If your development does not meet the new requirements, it’s likely that units within your association will NOT be approved for mortgage financing. The big problem is that many condos and coops in New York, that met the old requirements, no longer meet the new requirements. Their Boards and Management Companies haven’t yet learned of these recent changes. Therefore, loans are not closing and condo and coop boards, once notified, are scrambling to satisfy the new requirements.
If you are planning to purchase or refinance a condo or coop, what should you do? Speak to a qualified Mortgage Planner who is familiar with these new requirements. Then verify whether your Association meets these provisions. If yours falls short, inform the Board of Directors so that they can address it. It might take some time for your building to correct the problem. But it’s better to initiate the corrective process now – rather than learn later, after your appraisal has been done and your mortgage approved – only to have the loan pulled out from under you.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.