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Tag: Fannie Mae

Castles in the Sand

Surfside: More collateral damage

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

It’s not surprising that as time goes on, more and more of what I’ll call “collateral damage” surfaces related to the Surfside building collapse on the east coast. This time, it’s related to mortgage qualifying regulations.

Fannie Mae and Freddie Mac, the quasi-government agencies that set the standards for residential mortgage financing, are asking questions about the viability of condo buildings before approving financing. Specifically, they said they would stop buying mortgages from lenders in buildings with significant deferred maintenance or safety issues.

Fannie and Freddie have provided lenders with new in-depth questionnaires to be completed by condo management companies, associations or boards about the condition of the building where financing is being requested. The Catch-22 on this is that the individuals responsible for filling out the form aren’t sure of how – or are indeed qualified – to answer all the questions. Some of the questions really need to be answered by a structural engineer, or at the very least, a home inspector.

This is a huge potential problem for buyers requiring financing on a condo since the lenders are worried about their financial exposure related to the condition of the buildings they hold the mortgage on. This is already slowing up the loan approval process, particularly for condos in the more affordable price ranges. Of course, this could have a negative impact on the condo market for both condo values and the ability to sell.

Another aspect of this is how mortgage qualifying regulations will affect volunteer board members and management companies. The more complicated the process and the more likely the risk of liability the more difficult it will be for associations to recruit residents to serve on a condo board. In addition, management companies will have to ramp up their staff to understand and complete additional paperwork. This additional work will certainly be billed back to the associations.

Fannie and Freddie have taken the position that these measures are meant to protect residents from unsafe buildings and to ensure that aging condos are undergoing the necessary repairs and are funded to do so. They have indicated that they will work with associations to minimize disruptions related to the questionnaires, but how long that will take is anyone’s guess.

Fannie Mae and Freddie Mac have enormous power in the real estate market and although they do not set building codes, they do have the power of the purse when it comes to approving financing. Since they control approximately half of the country’s home loans, and between 7% and 9% of condo and co-op loans, we’re talking about what could be a big impact on the market.

Before you give up on a condo purchase that involves financing, most of what is stated above will not apply to the average condominium association. Buildings that obviously have major structural defects that have been put off and are underfunded will certainly have an issue, but the average building that has been maintained will likely be approved. It may take a little longer for the paperwork to be processed at the beginning, but the end result may actually be beneficial to buyers.

As I’ve said before, collateral damage as a result of the Surfside collapse will be around for a long time, but we’ll get through it.

Castles in the Sand

Fannie, Freddie and Ginnie

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Fannie, Freddie and Ginnie may sound like the title of the newest coming of age beach read, but that couldn’t be further from what they actually are. Nevertheless, this trio may also be going through a coming of age moment which will have a heavy impact on home finance.

Most people have heard of Fannie Mae and Freddie Mac, which are government-sponsored but not government guaranteed entities that package mortgage loans into mortgage-backed bonds. Ten years ago, after the financial crisis, the federal government took them over into a conservatorship and bailed them out with taxpayer money.

At that time, they were thinly capitalized because they purchased subprime loans with little down payment from buyers who were also not vetted properly. As we all now know, this created the famous housing bubble that burst with millions of foreclosures around the country. Well, Fannie and Freddie are at it again creating risk by accepting high-risk, low down payment loans. For years even before the housing bubble some members in Congress and the House Financial Service Committee have been attempting to reduce the scope of Fannie and Freddie and protect the American taxpayer.

There has been talk in Congress of developing a private capital program in conjunction with Ginnie Mae. Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration.

FHA loans have been around a long time, designed to help borrowers who couldn’t get conventional home loans because they had low credit scores or limited resources. However, unlike the subprime loans from 10 years ago these borrowers as well as the properties they purchased were better scrutinized. FHA inspected the properties being financed through them and were sometimes a seller’s and realtor’s nightmare because of their thorough procedures. VA loans are also created through Ginnie Mae as a veteran’s benefit. Currently, only about 10 percent of mortgage-backed loans are originated through Ginnie Mae.

The program that is being floated is to work with private mortgage credit guarantors using the Ginnie Mae system creating a private capital buffer for the loan. Presumably, this would protect taxpayers from some of the risk encountered when Fannie Mae and Freddie Mac were taken over by the government and bailed out by taxpayers. The objective is to reduce the size of Fannie and Freddie and put some of the risk onto private capital.

Will this work? No one really knows and any threat to Fannie and Freddie will encounter enormous pushback from government officials not to mention Fannie and Freddie employees, who have an obvious financial benefit to keep expanding these agencies.

Not only are our primary mortgage lenders going through a generational change, but our newest generation of adults may also be going through a generational change. Gen Z children, who are now college age or about to graduate, appear to be a lot more serious about finance than their parents and even their hippie grandparents.

Having lived through the financial crisis and experiencing the scars left on their families, they are approaching adulthood with a more conservative bent. According to The Wall Street Journal, they are doing a lot less partying and consider being well-off financially an important part of their lives.

Who knew that kids raised on video games, youtube and texting would turn into a generation we haven’t seen since the Greatest Generation. Works for me and for the future of real estate.

More Castles in the Sand

Attorney or no attorney – that is the question

Honesty is the best policy – especially in real estate

Why aren’t you moving?