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May 21, 2008
Are the New FNMA Guidelines Realistic?
Adrian Adams of Adams and Aucoin in SoCal just put out a newsletter listing the new requirements FNMA has published. You can read what he has to say by visiting DavisStirling.com (not a government-backed website; its a law firm website - but very informative), and what FNMA has to say by visiting https://www.efanniemae.com/sf/refmaterials/approvedprojects/index.jsp?from=hp.
Here is my take on the new regs. GET REAL FNMA! If this secondary lending organization (known for buying loans in bulk) wants to continue to buy condo loans (and I assume there is a profit in it or who would be in the business of doing it??), I foresee having to back down on some of the new requirements. Why? Here are some reasons:
1. HOAs in California are typically underfunded, meaning shy of having 100% of the money needed to fund improvement, rehab, reconstruction and major projects. Heck, many are having a hard time meeting operating costs. The new regs require lenders to attest to the fact that the HOAs are "adequately funded." At the request of a couple of lenders, I created a lender class to help them learn to read association budgets and reserve studies in order to assist them in making this "representation." After my first class, the concensus was that they either had to (1) go forth with consirable liability exposure, (2) not work with FNMA, or (3) go back to FNMA and discuss these impossible standards.
2. I do not believe associations generally have enough money in reserves to cover large insurance deductibles, such as earthquake insurance. If you remember (those of you immersed in HOA issues), Freddie Mac posed a new requirement - after the Northridge losses - that in order to purchase a condo loan, the HOA had to have the earthquake deductible 100% covered in funds in the association accounts. That did not last long before it was retracted - I believe that would have eliminated the purchase of any HOA loans because HOAs do not have that kind of ability. It would likely make condos unmarketable if the owners had to come up with the assessments to immediately fund earthquake deductibles.
3. The California legislature is being counterproductive to the option of HOAs to invoke amendments that would limit leasing in the developments with the introduction of AB 2259 relating to limiting these provisions. The very reason HOAs consider lease limitation amendments is to counter the FNMA and Freddie Mac regulations that deter the purchase of loans in HOAs with a high percentage of rentals.
4. It seems to me that many new HOAs seeking the FNMA "gold seal" or certification of approval would fail if the number of investor owners had to be less than 10% of the units.
5. If FNMA cuts out the condo associations that are not separately metered, that is a BIG CHUNK of condo associations. Although there seem to be many benefits to doing so, some just cannot afford it, especially in these hard economic times.
6. If FNMA is not going to purchase loans where the HOA is more than 10% delinquencies on the HOA accounts, well, there go more out the door. HOA delinquencies today are doubling, tripling and worse, because of the subprime lending issues, hard economic times, and cumulative effect of California legislation that protects HOA owner/debtors and makes it harder for HOAs to collect assessments. While 10% and under for delinquencies was a reasonable goal a few years ago, it is unreaslistic for many HOAs today.
So, I have to ask the question, FNMA, do you want to buy condo loans or not? Only time will tell.
Posted by Beth Grimm at May 21, 2008 12:47 PM