Squeeze in lending rules choking condo market - More developers seeking FHA approval for easier mortgages

Squeeze in lending rules choking condo market - More developers seeking FHA approval for easier mortgages
By Mary Ellen Podmolik
Copyright © 2009, Chicago Tribune
July 12, 2009
http://www.chicagotribune.com/business/chi-sun-condo-sales-jul12,0,3624240.story


The glut of unsold condominiums in Chicago has caused developers to offer upgraded appliances, special financing packages and, in one extreme case, $100,000 price reductions.

There's been little condo buildings can do, though, to sidestep dramatically tightening guidelines on mortgages that government-controlled companies will back.

Those restrictions are crimping a local condo market burdened with an oversupply of inventory at the same time consumers are dealing with the Chicago area's 10.7 percent jobless rate.

"It is not killing the market, but it is definitely hurting it," said Michael Golden, co-founder of @Properties, of the stricter requirements.

In March, sales of Chicago condo units listed with Midwest Real Estate Data LLC's multiple listing service were down 41 percent from a year ago. In April, the year-over-year decline was 55 percent, and in May it was 56 percent. Yet according to the Chicago Association of Realtors, condos have experienced less price erosion than single-family homes.

"This is telling us that this is the healthiest segment of our real estate market," said David Hanna, Realtors association president. "Why are we punishing people to be there? This is quashing entry-level buyers, which we need to get the market going."

This year, almost 4,700 new condo and townhouse units are expected to be completed and ready for occupancy, and less than 60 percent of them were under contract in the year's first quarter, according to data from Appraisal Research Counselors.

"I walk out of my office in Printer's Row and all around me I see condos dead in the water," Hanna said.

As of July 1, Freddie Mac no longer will guarantee mortgages in new condo buildings where less than 70 percent of the units have been sold. Fannie Mae adopted the same threshold March 1. Previously, the requirement was 51 percent.

The changes come on top of a matrix of fees adopted by Fannie and Freddie this spring that increase the cost of a mortgage for condo buyers with various credit scores and also impose fees for buyers who make down payments of less than 25 percent.

Fannie and Freddie's set of requirements "certainly limits the loan options for buyers," said Gail Lissner, a vice president at Appraisal Research Counselors. "It's hard enough in this market to get to 50 percent. To get to 70 percent is very difficult, considering the fallout that's occurring at closing."

As a result, some developers are turning to their own lenders and arranging short-term private financing for buyers. An increasing number, though, are applying to have their developments approved by the Federal Housing Administration.

A building has to be only 51 percent sold in order for buyers to receive FHA-backed mortgages, and the down payment required is 3 1/2 percent.

Because of the lesser underwriting requirements, the FHA's share of mortgages insured for new-home purchases has grown, even before the more stringent Fannie Mae and Freddie Mac rules were adopted. For the five-month period between October and February, FHA's market share of new-home purchases was almost 23 percent.

Condo buildings want in on that action. Since October, 68 Chicago condo buildings have received FHA approval, and an additional 51 buildings have applications pending.

For years, many developers shunned FHA, in part because the approval process was time-consuming and the label didn't carry much cachet. Those concerns have evaporated.

"If I owned a project right now that had a lot of inventory, I would do everything in my power and more to get it made FHA. Developers in trouble need to be more flexible for buyers," said Terrapin Properties' Jake Geleerd, whose own Burnham Pointe condo project was changed into apartments.

A few years ago, Terrie Whittaker, sales and marketing president at New West Realty, never would have considered seeking FHA approval for a project. But late last month, the firm's 1555 Wabash Ave. condo tower received the now-coveted FHA designation.

"Now we care deeply and passionately," Whittaker said. "I care about anything that will help me sell a condo. I still have 47 or 46 percent of the building to sell."

With the approval in its pocket, New West started closing on units last week.

One of the building's future residents is Zaneta Howard, a recent transplant from Philadelphia who has been shopping for a Chicago condo since October. While sales agents in new buildings said "we can make anything work," she often found the final offers weren't as compelling as she'd hoped. Her real estate agent then helped her look for FHA-approved buildings.

"For me it was very exciting, very important," Howard said. "Cash is king. Now I can keep a little more cash in my pocket."

The FHA recently issued new guidelines that it says will help speed how long it takes to get a project approved by the agency. The new rules kick in Oct. 1.

Meanwhile, Fannie and Freddie's more stringent requirements may go under the microscope. Last month, Reps. Barney Frank (D-Mass.) and Anthony Weiner (D-N.Y.) sent a letter to the chief executives of Fannie and Freddie asking them to review the 70 percent threshold.

mepodmolik@tribune.com