Benjamin Chiang nearly lost the chance to refinance his condominium when his lender discovered that many other people in the building were behind on their condo association dues.
“It made me a little peeved that my loan depended on the credentials and behavior of my neighbors,” said Chiang, who bought his Arlington, Va., home eight years ago.
Condo owners share more than roofs and lobbies these days. They also share one another’s financial burdens. New mortgage industry policies are forcing lenders to look more closely at the makeup of entire complexes before extending loans to prospective buyers or to people who want to refinance.
The increased scrutiny is making it tougher to buy -- and hence sell -- condos, which are widely considered the housing market’s shakiest segment because they are popular with speculators and financially vulnerable entry-level buyers. The policies are also exacting higher fees and larger down payments from condo buyers while limiting where they can live.
A lot of foreclosure-related losses have come from condo lending, pushing prices lower and wrecking condo association budgets. Some areas have had particularly dramatic drops in sales volume -- as much as 50% down from 2006 in some Washington, D.C.-area counties.
“There’s a recognition that a lot of condos are in weak hands,” said Mike Larson, an analyst at Weiss Research in Florida. “There’s a lingering fear that there will be more fallout and that’s why more conditions are being attached to condo loans.”
In Chiang’s case, about 17% of the residents in his small building were more than a month late on dues -- just above the new 15% limit set by mortgage financiers Fannie Mae and Freddie Mac.
These two government-run firms buy only loans that meet their rules. Their size means they shape lending policy. Chiang ultimately got his loan, but only because he had more than 50% equity in his home, he said. “So my lender made an exception.”
As the giddy days of the housing boom neared an end, the highflying condo market fell first and hardest. This region felt the pain acutely. Skittish buyers of fancy new units canceled their contracts in record numbers. Anxious developers converted condos to rentals. Others dramatically slashed prices, and sellers in older buildings cut their prices to compete.
William Rich, a vice president at the research firm Delta Associates, said the area’s condo market may stabilize at the end of this year or in 2010. But it will take awhile for the mortgage industry to respond to improvements.
“There’s always a lag time between when conditions change and when the banks respond,” he said.
For now, people who don’t have tons of equity in their homes -- or piles of cash for a down payment -- are struggling.
Jennifer Lubrani, for instance, gave up on several condos in North Arlington because she could not come up with the 10% down payment required by many lenders in areas where home prices are falling, including this region.
Instead, Lubrani took out a loan backed by the Federal Housing Administration, put down the minimum 3.5% and bought a condo in South Arlington. Using an FHA loan limited her options to buildings approved by the agency.
“It kind of bummed me out,” Lubrani said. “The buildings here are older than in North Arlington, where I really wanted to live.”
In the recent past, FHA policies barely affected the condo market. Americans abandoned FHA mortgages, seduced by subprime loans and easy credit.
Developers did not bother to get their buildings approved by the agency. But after the subprime market crashed, borrowers flocked back to the FHA, and suddenly, its policies matter.
Liz Etchells started with a conventional loan. But days before she closed on her condo, she learned that too many residents in her building were overdue on condo association dues. The lender then hastily arranged an FHA loan, but that meant that Etchells needed to go through the spot-approval process.
“I had no idea that this issue existed,” she said. The last-minute switch came at a cost. To get approval, Etchells and her husband, Pete, had to pay nearly $400 for building managers to quickly fill out a government questionnaire, said her loan officer, Gleyde Schatz of Intercoastal Mortgage.
The stakes are even higher for buyers interested in newly built condos. In those buildings, 70% of the units must be presold before Fannie Mae or Freddie Mac will buy related loans, though exceptions are made. Previously, only 50% had to be presold.
But the rules risk disrupting sales, especially in parts of the District of Columbia that tend to attract diplomats and others who are often temporarily transferred for their jobs, Murphy said.
“Here, people are in motion,” he said. “While they’re gone, they count as investors if they’re renting out their places. That throws everything off for people who are trying to buy in those buildings.”
Sellers suffer consequences as well, said Joan Caton Cromwell, a real estate agent at McEnearney Associates. Cromwell recently listed two condos in the District, neither in buildings preapproved by the FHA. She received an offer on one from a borrower who was using an FHA loan.
“I could wait for spot approval, but who knows how long that would take?” Cromwell said. “So as a listing agent, do I risk pulling it off the market while I’m waiting for this approval that may or may not be granted? That’s the real dilemma.”