RIP Fannie & Freddie? Struggling Loan Programs Will Impact HOAs

RIP Fannie & Freddie?

 One of the biggest issues in the real estate industry over the past year has  been the speculation that government-sponsored mortgage programs Fannie Mae and  Freddie Mac will be ending. For the past 70 years, Fannie Mae and Freddie Mac  have helped countless Americans secure long-term, fixed-rate mortgages, by  purchasing them from lenders and securitizing them, all with the unofficial  guarantee of the federal government backing them up.  

 Both saw their own corporate finances collapse two years ago, amid the housing  and credit crisis, and that led to the Obama administration calling for their  end. During the 2008 financial crisis they collapsed into government  conservatorship as a massive number of loans in its vast $5.6 trillion  portfolio started to fail.  

 “We need to wind down Fannie-Freddie and substantially reduce the government’s footprint in the housing market,” Treasury Secretary Timothy Geithner announced in February of last year. “And that’s a process that has to happen gradually, because they are now the dominant  source of housing finance, and we want to be careful that that process happen  in a way that doesn't interfere with, or impede, the process of repair in the  housing market.”  

 The Treasury’s plan is committed to doing this over a term of five to seven years, putting in  place new regulations, which will allow the private sector to replace the  government involvement in the housing market.  

 Most industry professionals believe that Fannie and Freddie became scapegoats for the housing market meltdown. However, Peter J. Wallison, an attorney and the Arthur F. Burns Fellow in  Financial Policy Studies at the American Enterprise Institute, specializing in  financial market deregulation blames Fannie Mae for the crisis, in large part  because the corporation bought a lot of private-label securitizations as a way  to meet targets for putting money into affordable housing. This we know did not  work as planned. As such, the FHA has had to take the lead in the origination of home loans, whether to  purchase, refinance or for home improvement.  

 What to Know

 Leading experts have spent most of 2011 urging people to pay attention to  developments in these programs and prepare themselves for the possible demise  of, or massive changes in, these government-sponsored enterprises.  

 “The stakes for homeowners, homebuyers and communities are enormous,” says Community Associations Institute (CAI) CEO Thomas M. Skiba, CAE. “Rules being developed today may likely govern mortgages for the next several  decades. If you live in an association or work in the community association  industry, you need to understand the magnitude of these issues, keep abreast of  the latest developments and weigh in when such opportunities are available.”  

 According to the pros, it’s generally not speculation about Fannie Mae, Freddie Mac and the FHA that is  affecting condos and HOAs, it’s a lack of clarity about the guideline “The effect on HOAs and condominiums is the apprehension that there may be more  difficulty maintaining liquidity in their developments, but this is nothing  new,” says Orest Tomaselli, CEO of National Condo Advisors, LLC, a New York-based  firm that helps condo communities navigate the loan approval process. “It seems more established HOAs and property managers tend to worry less about  changes to Fannie and Freddie because they don’t perceive themselves as needing lending opportunities. This is because the  majority of their condominiums are already sold and established.”  

 However, this is a misconception on their part. Maintaining lending  opportunities allows current homeowners to resell, refinance, prevents defaults  and foreclosures, and increases property equity overall. After the financial  crisis hit, Tomaselli told attendees at a recent trade expo in Chicago hosted  by Yale Robbins, Inc.—the parent company of The South Florida Cooperator—about 9,200 developments across the country lost their FHA approval and haven’t gotten it back.  

 Changes in the Offing

 While the administration has gone on record telling Congress that it is “committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to  perform under any guarantees issued now or in the future,” and has suggested that the federal government will still provide some “targeted assistance” for low- and moderate-income home-buyers and renters, not everyone is so sure.  

 Most experts agree that the market will benefit from stricter underwriting requirements and larger down payments. This provided a windfall for investor owners who reaped the benefit of use of  and/or rental income from the property while failing to pay association  assessments in addition to their mortgage. Most of these particular properties  had little; none; or even negative equity in the property. The investors didn't  have any incentive to honor financial obligations to the associations and due  to backlogs in foreclosure courts, this meant these investors could hold on to  the property for an extended period of time.  

 On the other hand, there is speculation that private lenders will not be  amenable to long term fixed rate mortgages, especially since the interest rate  is at a record low.  

 Most experts agree that adjustable rate mortgages increase volatility in the  market since a borrower's income or cash flow may not keep up with the interest  rates. Accordingly, if a borrower defaults and and property values remain  steady, or decrease, the only entity which will suffer is the association.  

 A recent joint report issued by the Treasury Department and the Department of  Housing and Urban Development (HUD) cautioned that private markets, going  forward will be the primary source of mortgage credit and bear the burden for  losses.  

 Among changes being discussed are limiting loans to poor/middle class people, or  changing how loans are insured.  

 “If the current administration limits loans to be available only for poor and  middle class buyers, then there will be a complete gap in the market for  financing availability” Tomaselli says. “Higher priced condominium developments will certainly be affected by seeing a  reduction in value. Economics 101 details supply and demand. Demand will be  reduced based upon the lack of available mortgage financing and cause an  oversupply.”  

 When developments don’t seek FHA and Fannie/Freddie financing, potential buyers are limited to buying  in cash only or seeking less favorable alternative methods of borrowing. This  will make it nearly impossible for current homeowners to sell or refinance.  

 “Furthermore, uncertainty about these rule changes and changes in the way that  loans are insured have an impact on new developments and on current HOAs being  able to maintain liquidity and interest in their developments,” Tomaselli says. “Purchasing a condominium would become a riskier proposition for buyers,  decreasing demand and further depressing the market.”  

 Conforming Loan Limits

 As of mid-October, plans were circulating to lower the “conforming loan limit” conform from $729,000 to $625,500, and it’s expected to be debated further and carried over until next year.  

 Even if true, multiple research reports indicate that this will affect only a  very small segment of the overall housing market. However, for more competitive  housing markets where prices are higher, making it harder to achieve a loan and  increasing the borrowing costs could decrease potential buyers. So, there will  be less demand, which means sellers are going to feel pressure to reduce their  prices.  

 “This naturally will affect HOAs in many condominium developments, since it will  limit resale ability. It also may hurt the development’s equity because if a person needs to sell their unit to avoid being foreclosed  upon, but they can’t get a buyer because of tighter lending restrictions, they may sell their unit  for the outstanding loan balance, which may be less than the market price,” Tomaselli says. “This lowers the equity value within the development.”  

 Additionally, it may become more difficult for many borrowers to refinance into  today’s lower rates, since reduced demand has caused the value of their home to  decrease.  

 “Also of concern is that people will not ‘upgrade’ and move to a larger, more expensive home or condominium unit because they now  are unable to afford a jumbo loan,” Tomaselli says. “We will also see a decreased demand for FHA financing because Fannie/Freddie are  seen as the gold standard for ‘jumbo’ loan limits. Upscale communities especially will see the effects in having to  drop prices, and will find it harder to find buyers, because down payments will  be increased since loan limits are smaller.”  

 Information is Key

 The best way HOAs, buyers and homeowners can prepare themselves for what is to  come is by staying informed and creating relationships with industry  professionals who understand the complexities and nuances of the rules and  regulations.  

 “You should make sure your lender and consulting company is established and stays  abreast of industry trends,” Tomaselli says. “A reputable project approval and condominium financing company should be able to  tell you not only why your development is or is not compliant but what  specifically your development needs to do to get approved by the various  governmental agencies.”  

 One key to survival is to ensure that an organization engages in proper  budgeting and maintaining adequate reserves. The best way to accomplish this is  for an association to have reserve studies prepared and include capital  expenditure projections. Both of these need to be taken into account when  budgeting for current association needs.  

 Community leaders can take proactive steps to improve mortgage options for  potential buyers. Many condominium associations have undertaken the process to  become FHA approved. Adequate reserves, insurance and attending to the  maintenance/repair needs of the community are factors lenders take into account  when evaluating loan-to-value ratios.  

 No one knows for sure what will become of these programs and with the  possibility of a new Presidential regime being elected in 2012; all anyone can  do is speculate for the moment. Still, there is no denying that fear has set in  and people need to stay on top of the government lending situation.  

 So especially in such an uncertain economy, mortgage financing is crucial to the  housing market in general and to the overall health of a condo, townhome or  community association.

 Keith Loria is a freelance writer and a frequent contributor to The South  Florida Cooperator. Associate Editors Hannah Fons and Liam P. Cusack  contributed to this article.  

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  • Ken Simonson, chief emiconost for the Associated General Contractors of America and the NABE's point person on the survey. The tone of the overall survey, he said, was extremely gloomy.