Condominium sales continue to be sluggish in Connecticut, but it may be more than just skittish homebuyers impacting the market.
Local realtors and brokers say new, stricter lending guidelines for condominiums established by Fannie Mae and other government agencies a few years ago are creating headaches and making it more difficult for some would-be condo buyers to obtain a conventional mortgage.
The new rules are contributing to at least one recently built condo development in West Hartford sitting on a cache of unsold inventory, and likely discouraging new development as well, real estate experts said.
“Condo financing has become a difficult issue,” said Jeff Lipes, the senior vice president of Family Choice Mortgage in East Windsor. “Even someone with perfect credit and great income may not be able to finance a condo due to the requirements.” Family Choice is a wholly owned subsidiary of Rockville Bank.
The new guidelines were established by Fannie Mae in 2009 in the wake of the financial crisis, which caused the government-backed purchaser of home mortgages to be placed into conservatorship after it faced a tidal wave of loan defaults, including from condominiums.
Freddie Mac and the Federal Housing Administration, which insures mortgages, have also adopted stricter lending guidelines.
Fannie Mae’s regulations center on determining which condo developments qualify for conventional mortgages. Essentially, officials want to create more certainty that condominium buildings and their associations are financially stable before Fannie Mae buys or backs a loan to condo buyers who take residence there.
Terence Beaty, director of Prudential Connecticut Realty Specialty Services in Wallingford, said the most stringent regulation is that Fannie Mae won’t approve mortgages within a newly constructed condominium complex unless 70 percent of the units in the building are pre-sold.
It used to be a 51 percent pre-sale requirement.
In addition, to meet Fannie Mae standards no more than 15 percent of condo units can be more than 30 days late on monthly maintenance fees, and no more than 10 percent of a project’s units can be owned by a single investor.
There are also tighter restrictions on condo-owners insurance. And condo associations are required to set aside larger reserves equal to about 10 percent of their overall budget, up from 5 percent previously.
The 70 percent pre-sale requirement has caused particular problems for the Loomis-Wooley development on Prospect Avenue in West Hartford. Originally slated to be a 15-unit condominium complex with high-end townhouses that dawn facades reminiscent of the Victorian era, only 11 units have been built so far.
And only four of the 11 units have been sold even though the project was completed in 2007. Besides the slow market, Coldwell Banker broker Maryalice Widness said prospective buyers who have shown interest in the property have had difficulty qualifying for a conventional loan because the development doesn’t meet Fannie Mae’s pre-sale standards.
When prospective homebuyers can’t qualify for a conventional mortgage, they either need to pay cash or find a lender — typically a community bank — willing to underwrite an unconventional loan, which would likely require a higher down payment.
“Prospective buyers are virtually unable to get financing,” Widness said.
Widness said the lack of activity has forced the Loomis-Wooley developers to rent out some of the townhouses.
And the property values there are taking a hit. Early on, three condos in the complex sold in the $500,000 range, but one bank-owned property in Loomis-Wooley recently sold for $320,000.
The slow housing market is also playing a role. And because the developers are unable to sell the remaining condos, banks are unwilling to finance the construction of the last four units that were originally part of the project, Widness said.
It’s not clear how many condominium complexes in Connecticut are having similar problems, but it’s likely not as widespread an issue as it has been in other states like Florida where many new developments came online in the last few years.
But the new rules are likely preventing some new condo projects from getting off the ground, said David Adamo, the CEO of the Luxury Mortgage Corp. in Stamford.
And the market for condo sales in Connecticut remains sluggish.
April condominium sales in greater Hartford decreased 41 percent (from 230 to 136) from April of last year. The median sale price also dropped about 1 percent (from $156,250 to $154,950) and the average number of days a condo spent on the market increased 28.42 percent (from 95 to 122), according to the Greater Hartford Association of Realtors.
Inventory also increased 3.51 percent (from 1,880 to 1,946).
Lipes, of Family Choice Mortgage, said he understands the concerns of both sides of the issue. He said Fannie Mae has been burned in a lot of projects when the presale requirement was 51 percent, and then sales came to a halt and the association did not have the revenue to support the complex without raising the current owner’s fees.
“The bottom line for a developer is to make sure they have some type of financing set up by the bank who gave them the construction loan for those buyers before the presale requirement is met,” Lipes said. “Without this, it will be very difficult to get conventional financing.”
The rules are also impacting existing condominiums, especially the higher reserve requirements for condo associations.
Jason Will, head of national condo sales for Wells Fargo Home Mortgage, said although the new rules have caused headaches for some developments, things have improved. Will, who is based in Florida, said a lot of the projects that were paralyzed or challenged by the regulations are beginning to work their way through their problems.
And he said Fannie Mae has been willing to grant exceptions to some of its eligibility guidelines on a case-by-case basis.
This article appeared in the Hartford Business Journal - By Greg Bordonaro last week.
