New Fannie Mae Guidelines Turn Off the Lights on the Florida Condo Market
January 26, 2009 by Lucas Lechuga
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.
Isn’t Fannie up to a conforming limit? 417k…Most Condos are priced higher anyway.
I wonder what this will do to the rest of SF real estate (residential & townhomes). I suspect these new rules may boost those sales as potential condo buyers are effectively pushed out of the condo market and forced into buying a home or townhouse. Thoughts?
interestingly, this may force some developers to offer very low non bulk prices in order to push the percent closed number closer to 70% while keeping at bay the issue of 10% ownership of a single entity. individual buyers very well could end up with some great deals near term as developers try to meet these requirements at the minimum, then offer the remaining units at higher prices where standard mortgages will be allowed. Lucas, keep me posted if this occurs and you have a customer!
Anything that gets us to the bottom faster should be applauded. The sooner we hit the reset button — the sooner we rip off the bandaid and get back to econ 101 — the better off every single one of us (distressed homeowners included) will be.
I’m tired of a car crash in slow motion. I want screeching tires, a head-collision and airbags deployed. Ambulances on the scene. Morphine drip and flower arrangements.
Seriously, this is great info. I’ve been looking at a property where the developers asking price is ~$350/ sq. foot. I’m planning on putting in my offer next month at ~$200 s. foot (cash offer), thinking I’d be low balling, and would be willing to settle for as much as $220-240/sq. foot. Unit is decorator ready too, so I figure I’ll still have to put in around $30k just to get it into move in condition. Maybe I should hold firm at my $200/sq. foot offer.
Lucas,
Please Explain…
If a Bulk Buyer is only allowed to purchase 1/10th of total units then how will they be able to set a floor on the building.
If my understanding is correct, the Marina Blue deal would not have been allowed to go through if done after these new rules because it was more than 10%.
This seems like a disaster.
Lucas, I disagree with your argument that, due to FNMA’s restrictions, “true demand will not be represented.” If you consider true demand to be effective demand (i.e. ready-willing-able buyers), then true demand comes from those buyers able to purchase at prevailing pricing and financing conditions. Not those who want a condo real bad but cannot buy one.
In essence, it’s like the Ferrari demand situation: notional demand exceeds effective/true demand. There are many more people who would like to buy a Ferrari (notional demand?) than there are those who are ready, willing and able at current pricing and financing conditions.
True demand for Miami condos is currently limited by high pricing and it will be further limited by reduced availability of financing. But it’s still true demand.
Also, if, as many expect, nominal condo prices hit bottom and stay there for several years, there will be a U-shaped price curve, as opposed to a V-shaped one. If condo prices stay at a bottom for several years, it would not be correct to call such a situation an overshoot to the downside.
Christopher,
Bulk buyers can buy as many units as they want with cash. However, if they buy over 10% of the units then FNMA will not approve mortgages in the building for future buyers who require financing. For example, the 60-unit bulk sale at Marina Blue represents 11.6% of the units in the building. I assume that means that FNMA will no longer approve mortgages for the building and that owner’s will only be able to sell to cash buyers unless FNMA provides an exception for the building.
Realist Bob,
My definition of “true demand” is demand derived from cash buyers plus creditworthy individuals who would qualify for financing under normal circumstances. When I say “normal” circumstances, I am not talking about a return to irresponsible lending but rather a return to loans to individuals with stated income, high credit scores and down payments of at least 20%.
From my perspective, these revised regulations will simply keep me on the sidelines until things unfold a bit more. Why would I buy into a building knowing that there is a good change that prices will fall substantially in the next 6 months because of lack of qualified buyers and sellers on the edge of collapse? It simply makes owning a CONDO less attractive along with all the other condo negatives to work through…so much for a condo being a carefree lock and leave lifestyle…. I had hoped that I could spend the spring/summer hunting for a deal but looks like I will just hunker down and continue to rent which is fine with me since it saves me money at today’s prices.
The conforming loan limit in the Miami area is $417K. For me, I’d pay cash for anything above and borrow money for the $417K at these historically low interest rates at a 30 year fixed….cheap money.
With regard to demand….it is whatever number of buyers are willing and able to buy at a certain price point. Mark the on the beach condos to $100/s.f. and they will be gone before July. On concern about clearing out the inventory is the well posted shadow inventory of defaulted properties not yet foreclosed on that are building up due to bank delays and recent moratoriums, bank owned inventory not on the mls, and of course all those who are delaying selling their property until the market “turns around”……. I know of numerous people who would have like to have sold but are leasing out their condos instead because of market conditions….. Until the properties get into the hands of the end buyers, whether that is owner-occupied or cash flow positive landlords, it is all a game with bulk buyers simply being larger volume condo flippers and placing the units back on the market. The absorption rate to end users is very very slow right now and all of this is simply game playing and speculating…..bad habits die slowly I suppose. Sometimes it is better to simply cash in your chips, walk away and play a different game.
The bottom will be reached when several of these buildings have such dire circumstances that they cannot pay for water, trash pickup, elevator service, electricity or insurance. When the city fire inspector and building department has to close the building down.
When that happens it still won’t be the be the time to buy.
Another indicator of things to come, that the consumer is tapped out, is when Smurfit-Stone Container Corp. files for Chapter 11 bankruptcy reorganization. They are the largest producer of cardboard box materials in North America and was regarded as a well run business. The slowdown in demand for cardboard packaging along with tight credit knocked them to the mat. Debt creep is a b*tch and will take you out as you get complacent. Bye-bye debt financed lifestyles, priceless.
I have noticed in my building that rentals outpace buyers 3-1……
lucas…you should know better. you’ll overshoot on the downside regardless of FNMA’s actions. bubbles are irrational going up, and once bust, going down. the question is how vicious is the downside and “the day after” going to be.
Just saw this job that pays $30 Trillion a month!!!….no joke. The bad news is it is Zimbabwe dollars…. Apparently that is now worth only $1 USD. We have nothing to fear, but the printing press!
http://news.bbc.co.uk/2/hi/africa/7848302.stm
I just saw this job that pays $30 Trillion a month!!!….no joke. The bad news is it is Zimbabwe dollars…. Apparently that is now worth only $1 USD. We have nothing to fear, but the printing press!
Article is at below if you take out the spaces….couldn’t get it to post otherwise….
http://news.bbc.co.uk/2/hi/africa/7848302.stm
Sites like this are the future of news media. Phenominal. I feel guilty that I get this information for free. Therefore I will punish myself by calling up Ron Shuffield and asking him to explain South Florida’s “totally new economic model”.
The new 70% FNMA rule pertain to purchase contracts or closed units??
I guess the bulk buyers at Marina Blue came in a little too early. It is reminiscent of all the private capital that was pouring into banks in late 2007 and early 2008. Private capital covered the first $600-700 billion of bank write downs but all those investors were too early as well. Looks like all the early bulk buyers will also be taking a hit as prices continue to deteriorate. The real question is whether private capital becomes completely turned off the idea of condo purchases in Miami, as was the case with continued private investment in the banks.
The Fannie Mae regulation that no more than 10% can be owned by a single entity will seriously exacerbate the problem. Potential bulk buyers either have to remain below that threshold, which limits their investment flexibility, or if they exceed the threshold then they must either hold on to the investment until Fannie loosens the regulation or suffer from the reduced liquidity due to lack of financing. Either scenario means that bulk buyers will be demanding a higher discount to make the investment attractive so the clearing price for Miami condos will just be that much lower.
“No more than 20 percent of the project’s total square footage can be used for non-residential use.”
The above point would blacklist true mixed use building like the Four Seasons.
Dave said: “The above point would blacklist true mixed use building like the Four Seasons.”
If you can afford to buy at the Four Seasons, you don’t need FNMA to back-up your mortgage.
Further, if you entered the Four Seasons’ “rental plan”, which a number of owners did, you would be disqualified by FNMA anyway.
moretroops :
“Anything that gets us to the bottom faster should be applauded. The sooner we hit the reset button — the sooner we rip off the bandaid and get back to econ 101 — the better off every single one of us (distressed homeowners included) will be.
I’m tired of a car crash in slow motion. I want screeching tires, a head-collision and airbags deployed. Ambulances on the scene. Morphine drip and flower arrangements.”
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I like your anger.
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Wild Bill
“The bottom will be reached when several of these buildings have such dire circumstances that they cannot pay for water, trash pickup, elevator service, electricity or insurance. When the city fire inspector and building department has to close the building down.
When that happens it still won’t be the be the time to buy.”
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Had to read that twice.
So if that “still will NOT be the time to buy,” when will it?
Wild Bill:
“The bottom will be reached when several of these buildings have such dire circumstances that they cannot pay for water, trash pickup, elevator service, electricity or insurance. When the city fire inspector and building department has to close the building down.
When that happens it still won’t be the be the time to buy.”
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Muir:
“Had to read that twice.
So if that “still will NOT be the time to buy,” when will it?”
NEVER……..Soon, we will NOT have to BUY! Obamunism will provide “FREE” housing (aka the 1970’s Brezhnev mandated buildings in Moscow). This will take place after the nationalization of Co-r-us (Condos-R-Us) Bank. Then, we all will be indoctrinated to remove the word “condos” from our vocabulary and replace it with the word “flats”.
I guess a certain Obamunist was a bit ahead of his time………
I think these new rules are a disaster for our condo problem. All these new constructed building are so screwed. I wonder if these guidelines were put in place just to get to the bottom very soon and once that happpens remove the guidelines.
Petronius
the bulk buyers from two years/year ago are already dead in the water. the MB folks…we’ll see if they’re prescient or morons in a year from now.
Lucas,
this new rules mean than that building like Plaza on Brickell that has over 70% closing rate will end up even better because people will not get approved for Marina Blue and will for Plaza on Brickell.
Is that true?
Thank god! The sooner the blood spills the sooner we capitulate the sooner we can resume a ‘normal’ life. Hail to Fanny!!!!
(even if this does cause ‘Bitter Tom’ to have to stay on the sidelines a spell longer)
The time to buy will be when condo boards prohibit pornography videos from being filmed in common areas of buildings. I still see all the buildings on this website are on a film crew list. That’s the lowest of the low. Seriously disgusting.
New rules are actually very bad for the market. They will limit people who are very capable of buying. IT is the same grave mistake as the idea to raise taxes when completely the opposite has a chance to boost the economy. It is very bad for everybody whether you are a buyer or a seller and even if you are waiting on the sidelines.
Banks jumped from one extreme to another, It seems like people who make these decisions are absolutely incompetent. I deal with the banks all the time due to my activity with REOs and I am amazed sometimes at how illiterate they are in the areas that are supposed to be their bread and butter and also how nobody cares. Nancy Pellosi stated today that there is a possibility of sort of nationalization of the banks. Then it is going to be a complete disaster.
Instead of giving a possibility to the market to clean itself they slow it down even further.
I agree with Lucas that people who show their assets and stated income with 20%down should be allowed to borrow.
“…people who show their assets and stated income with 20%down should be allowed to borrow.”
Such people are allowed to borrow; they just need to find a lender literate and competent enough to make such a loan.
All who think stated income condo lending in Miami is a great idea, should exercise their right to make a buck, and get together with a bunch of like-minded people, and lend their own money.
Wild Bill,
Since the depths of Depression are coming I will need a second income. Where are they filming? On a related note, how do I trademark the name ‘Hugh G. Donger’?
Wild Bill
Leave the Bang Bros. alone. If you didn’t know, they’re the culture in this town.
http://www.browardpalmbeach.com/2009-01-29/news/developer-tibor-hollo-helped-build-miami/1
Looks like those thirteen unit owners who were able to close at Icon will be living in a rental community soon.. Flamingo on Brickell..
Lucas, great article. Well enough written. Now we know more about Hollo. I never raised to the level of a developer ( except for developing my dreams) and this mess I am on the other side of the fence but always wanted to work for a developer of a high caliber because of the combination of fantasy , vision, hard work and being brave, very brave.
Lucas, have you met with Hollo? I know you probably have mixed feelings about him but if you did what was your personal impression about him?
Has anyone had any experience using NACA? They are the Neighborhood Assistance Corporation of America and they help first time home buyers get 100% mortgage at a current rate of 5.5%. A few weeks ago they were offering 4.6%. I checked out their website at naca.com and they seem legit, but I was just wondering if anyone has ever been a member or knows about them.
I was thinking with a low rate like that there can be some potential cash flow positive investments, although probably not a luxury condo. They even finance your house up to a 4 unit building. And the crazy thing is that they will finance you to fix it up and remodel. The only catch is that you have to live there for at least the first 3 years, but I don’t know how stingy they are on the rule. It seems too good to be true, but I also think it is for real.
If anyone knows about NACA please share…Thanks
Mr. Waverly said: “Looks like those thirteen unit owners who were able to close at Icon will be living in a rental community soon.. Flamingo on Brickell”
Sorry, but AIMCO doesn’t have any money and Huizenga was lucky to clean out Ross’ wallet before the “Estate of Lehman Brothers” serves Gourge with the “Mother of All Foreclosures”!
My recently unveiled re-naming of these buildings: “Stalingrad I, II, and III, may be more appropriate.
Living in the property for three years is not a “catch”, it is part of the program and that should be your intent if you are signing on for this program. We have already had to much fraud and scamming in the system.
With prices falling in the Miami area around 38% from peak prices according to Case-Shiller numbers, I would say the market is correcting rather quickly on its own. No need for govt intervention since we are getting closer to a clearing price every day. By the time the govt shows up to distort the markets, we should be near the bottom anyway. Gotta love affordable homes and loans made to borrowers with the ability and will to repay them.
Aaahhhhhh…, like, where’s AJ?
I wanted to do my best Mark (zilbert or not) imitation about alpacas and Bay facing versus West facing effects on fur, somehow, I thought of AJ.
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p.s. recommended reading “The money game” it’s from the 60s stock market but it’s a blast.
Wow. I think that there’s no other endgame than another 30% – 50% drop from today’s *distressed* prices. This is going to be a big, steep drop.
Any possibility that banks might just board up whole buildings to take them off the market for a few years?
1 bedroom short-sale at The Bentley Bay hit the market on Tuesday for $299,000. I doubt the lender accepts that price but it’s worth mentioning. The owner paid $600,000 for the condo in September 2005. It’ll be interesting to track this one. None of the one bedrooms have sold for less than $375,000 on the MLS. The condo looks to be in immaculate condition.
The new property search page just went live. Not much has change with the actual search box but you’ll notice that the results are displayed differently and that you can view multiple pictures from within the search results page. Click on the “More Info” link for one of the properties and you’ll notice that the details page has a new format as well. If you register you’ll be able to name and save searches, add properties to your favorites, add notes about those properties, view nearby sales and view recent sales.
The “My Dashboard” page, which you’ll view once registered, is a work in progress. It’s pretty plain right now but you’ll start to see new features added within the next couple of weeks.
Later today, you’ll have the ability to view details and pictures of recent sales and rentals. I’m sure you’ll all like that.
Lucas,
How does one register on your site?
Cancel that… I got it. AWESOME! thanks again
Came across this little gem:
“From his first success… to his latest project, the white cylindrical Opera Tower, Hollo has personally developed dozens of projects…
Yet the past 12 months have ranked among the toughest in Hollo’s 55 years as a developer. He has sold only about 38 percent of the condos in his multimillion-dollar Opera Tower, which opened last year. To stay above water on the building, he’s renting out the rest of the units for as low as $950 a month.”
Amazing.
Source: New Times Broward/Palm
browardpalmbeach.com/2009-01-29/news/developer-tibor-hollo-helped-build-miami/
OHHhhhhhh……
LUCAS!
🙂
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So modest!!!
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From the article:
”
Today, only a handful of new towers in South Florida have sold more than 80 percent, and some have sold less than half, according to Lucas Lechuga, a realtor who compiles condo closings on his website. Several are still trying to unload more than three-fourths of their condos.
“I still think there’s another round of foreclosures to come,” Lechuga says. “We have another year, until the end of 2009, before we hit rock bottom. And then prices still aren’t going to improve for a long while.”
Among the 21 condo buildings opened in the past two years that Lechuga has tracked, Hollo’s Opera Tower has the fourth-lowest percentage of condos sold. But Hollo says he has weathered the storm thanks to the lessons he learned in the past.”
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LUCAS!!!! Way to go!
Thanks Muir. You must have missed the link I posted yesterday. See comment 30.
Yeap, I missed it.
Great quotes from you!
Incredible article, read all of it, very entertaining, very readable.
This floored me: “he’s renting out the rest of the units for as low as $950 a month.”
If that’s correct any other investor’s PE ratio just went negative.
$950 is for a small studio. They are asking 2k+ for 1050 sf 2 bedrooms with bay view which I think is very high. You can get a 1400 sf 2 bedroom with bayview at Quantum which has much nice amenities for 2k. You can also get a 1040 sf 1 bed at 900 Biscayne for 2k.
Yes, but I’d love to run the numbers on that studio!!!
The $950 has to cover HOA and taxes.
Bet it doesn’t.
So, say you bought it as an investment and now have to compete and rent it at the current market rate of $950.
I’m not talking about the developer, I said “If that’s correct any other investor’s PE ratio just went negative.”
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For me, it’s just the same conversation as months ago.
If an investment has a negative PE, doesn’t that imply that you would need to be paid to buy the “asset?”
http://miami.craigslist.org/mdc/reb/1008384969.html
Check it out. 1 bedroom 900 Biscayne unit going for 230k. Is this too good to be true? That equates to 223.00 psf. So much for the prediction of high-end water facing units not going below 300psf. Where is AJ?