New Fannie Mae Guidelines Turn Off the Lights on the Florida Condo Market

January 26, 2009

In December, Fannie Mae established new lending requirements for condo developments located in Florida which went into effect January 15, 2009.

Some of the updated lending requirements are as follows:

• Up from 51 percent, FNMA will now require that at least 70 percent of the total units in a condominium project must be conveyed or be under a bona fide contract for purchase to principal residence or second home purchasers.
• New and established condominium projects may have no more than 15 percent of the total units in a project be 30 days or more past due on the payment of their condominium/association fees.
• New and established condominium projects with more than 20 units will be required to have fidelity bond/fidelity insurance.  It was formerly only required of new condominium projects.
• Borrowers must obtain a “walls-in” insurance policy unless the condo development’s master policy provides the same interior unit coverage.
• No more than 20 percent of the project’s total square footage can be used for non-residential use.
• No more than 10 percent of the total units in a condominium project may be owned by a single entity (the same individual, investment group, partnership or corporation).

The new guidelines are a train wreck to an already crippled Miami condo market but a godsend to vulture funds.  Step aside and let the bulk buyers clean up the mess.  They will effectively push the reset button and create a floor to a condo market that would otherwise take much longer to reach.  The guidelines set by FNMA will have a negative impact on established condos as well. Prices there will take longer to fall into place relative to the pricing established by future bulk sales.  Foreclosures will climb in established condo developments until an equilibrium of supply and demand is reached.  However, as one person commented in a discussion about this topic, the market will likely first overshoot to the bottom.   With very restrictive financing policies, true demand will not be represented as those with cash will comprise the large majority of the buyers.  Keep in mind that bulk buyers will either need to hold over the long run or resell the condos to cash buyers themselves due to the rule that no more than 10 percent of the condos can be owned by a single entity.

To get an idea of which new condo developments in Miami will be affected, read my latest condo closing rates published in December.