The Condo Approval Morass

It's not enough to qualify and approve the borrower, nor has it ever been, but when someone is buying in a condo or coop, the building must also be approved. This has become increasingly more difficult as condo / coop approval departments are overloaded increasing turn times, but also as Fannie Mae and Freddie Mac begin enforcing rules that up for years were not enforced.

One major hurdle with existing condos and new development condos is a line item in the budget for reserves that equals 10% of the budget. In most, if not all, of the other states in the Union, this is not an issue. But here in New York, it's becoming increasingly more of an issue. New York City has always gotten away without creating a reserve funds for 2 reasons. The first is that the NY Attorney General's office, which approves all condo offering plans, doesn't require it. The second is that here in NY the argument was made that if the budget ran low, or if a capital improvement was needed, there would be a special assessment to pay for it. Fan/ Fred went along with this, but not anymore.

So most budgets on new developments (though they are faster to change, needing the sales) and existing condo project don't have a reserve line item in the budget. They frequently have a contingency line item, but it doesn't add up to anywhere near 10% of the annual budget.

What do you do? Create a reserve analysis, that's what. You'll have to show that the contingency is enough for the capital improvements without a special assessment to the condo owners. This can be done by aggregating the amount that the contingency will accumulate in the next years before any major improvements or repairs need to be done. This is especially useful with new development where the assumption is that since it's newly built, it will be 10-25 years before the building will require a new roof, exterior work or other major expenses or improvements.

Another hot button is the pre-sales requirement for Fannie Mae approval. This has increased to 70% of the units for most developments. This is coupled with a new math in determining the pre-sales in a building as well. Sponsor held units are now counted, whereas before they were not, also any rental units (here in NYC some apartments in a conversion are rent regulated making it difficult to remove tenants) are now counted. Before they were not. Also any investor owned units are not counted. So what you have left is all of the owner occupied and second home units in a building. That can be tricky for areas like Miami, LA, SF, Vegas and NYC. This is on top of an already down market, so it's reducing the deal flow even more, since many banks will not offer financing in a building that is not approved by Fannie Mae. Even if the mortgage is not being sold to them, it's considered the gold standard for condo / coop approval.

If the building is a ground up new construction and less than 200 units, then it's possible to get it approved at 51% pre sold. If it's a conversion of any size then it's more likely to be 70%. There is a process by which Fannie Mae will do a full review of the building and approve it at a lower pre sale, but generally speaking it needs to be at least 51% pre sold (remember these need to be owner occupied or 2nd home buyers) and have good sales velocity. Also the developer needs to pony up a $1200 application fee along with $30 per unit for the review. There is quite a bit of documentation that is needed as well.

If that wasn't enough, the scrutiny of the building's insurance coverage has also gotten a bit tougher. The Fidelity Bond coverage is a bit more restrictive, also if the building's coverage does not cover an individual unit from the studs in, then the homeowner will need to buy insurance to make up the difference.

Managing Agents don't seem to be stepping up to the plate in this changing world either. They aren't completing questionnaires fully so that the building can be properly assessed. This is despite the fact that in NYC, they charge a fee for its completilon, sometimes as high as $125. They need to understand that they are doing their owners a disservice by not completing the questionnaires and providing as much information as they can to help the approval process along. Everyone in the process understands that it's a hassle, but it's not the man on the street's decision, it's much, much higher up than that.

HVCC Sucks

Recently New York Attorney General, in an effort to raise his image, fight corruption and save the American consumer from themselves, went to Fan/Fred and created the Home Valuation Code of Conduct that all mortgage originators (big and small) must abide by. On the surface, it sounds great. Greater appraiser independence, less commissioned individual involvement. Without going into how Mr. Cuomo decided that appraiser's were blameless in the recent fraudulent housing sales (it seems that every fraud ring includes at least one), the fact that the one party, the Loan Officer, who knows everyone in the transaction is completely (and I mean completely) removed from the coordination of the appraisal is crazy. Who do you think everyone, buyer, seller, seller's attorney, buyer's attorney, buyer's agent, seller's agent and even in house operations staff is going to call when the appraisal hasn't been scheduled in a timely manner? You got it...the Loan Officer. The one person who literally can do nothing. The one person who doesn't know who the appraiser is, what is their email address or telephone number or any other information. And the one person that the 3rd party vendor (owned by the banks) won't speak to or include in the process even as a spectator.

The break down is in the logistics. Loan Officers are the 3 monkeys in this case (see no, hear no, speak no). And we are the only party who's sole job is the coordinate all the players in the process. I guess Mr. Cuomo didn't think that through went he ran to Fan/Fred with his brave new idea.

Another aspect to the HVCC, is if there is a mistake on the appraisal, say for instance the appraiser noted that the unit appraised was 4B when it should have been 4FB or E4B. We cannot make a quick call to have it changed, nor can we contact the 3rd party vendor to have it changed, no the (currently overworked, can you say refi boom?) operations staff is the only one who can have it changed. And who fields all of the complaints when this isn't done for 3 weeks? You guessed it, the Loan Officer.

I agree with the gist of the HVCC, Loan Officers (including Mortgage Brokers) shouldn't have leverage over appraisers on the valuation of the home. Appraisers have licenses that can be held over their heads (not to mention felony charges) on these issues. But for the Loan Officer not to have access to even the 3rd party vendor to make a correction, make sure the correct phone is on the order, follow up on a order that is taking 4 weeks, is lunacy. Now the pendulum has swung too far to the other side. If we, as consumers, want to have our purchase and refinance transactions close within our lifetimes, we're going to have to have some Loan Officer input.

Bring back the stated income and 100% mortgage

Though there is an argument (often made by mortgage loan originators) that there must be a minimal risk underwriting box that for stated income and high loant to value products, these loans don't seem to be coming back any time soon.

Self employed borrowers are feeling like victims of banks' current underwriting guidelines when it comes to documenting income. Their Adjusted Gross Income (AGI) is much lower than the money their business brings in. Frequently self employed borrowers taking 2 positions when it comes to what their income is. When they file their tax returns, they use every write-off the IRS allows in order to bring their taxable income to the lowest it can be. That is legal and that is fine, however, know that what is written in the line on the tax return labelled Adjusted Gross Income, is the income that can be used with some slight variations. Often that isn't enough to qualify for a mortgage that the borrower wants.

There can be a few items (paper loss type things) that can be added back to the borrower's income. Items such as, depreciation, and home office use, can be added back to the borrower's income, but other than that, the AGI is the income that is used to qualify self employed borrowers.

We Reward The Risk Takers...

I guess the feeling is that we have to. I just finished an article on Forbes about D. Andrew Beal and Beal Bank. He stayed out of the fray during the go-go years from 2004 until 2008, originating no real estate loans. Now his bank is solvent, capitalized and ready to buy loans from other banks who need the $. And of course, there is no TARP money for him, no Fed assistance of any kind. The ratings people thought his model was unsustainable while greenlighting such winners as Lehman, and Bear.

It boils down to who has the most power.

WSJ Says Mortgage Rates May Be At Their Lowest

According to an article in today's Wall Street Journal, mortgage rates may not go any lower, confounding many borrowers' hope that they will go lower and lower.

Take a look at the article below:


By JAMES R. HAGERTY

The Federal Reserve is going to extraordinary lengths to push down long-term interest rates, including home-mortgage rates. But those hoping mortgage rates will fall sharply from current levels, already historically low, may be disappointed.

Mortgage firms Thursday were quoting rates averaging 4.75% on 30-year fixed-rate mortgages, according to Zillow.com, a real-estate information service. That is down from more than 5% two days ago and about 6% in mid-November. But further big declines will be hard to achieve, partly because the mortgage-lending market has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers.
Rates for borrowers with the strongest credit are likely to be in a range of roughly 4.5% to 4.75% for the rest of this year, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse in New York.

Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.
The Fed began driving mortgage rates down in late November when it announced plans to buy as much as $500 billion of mortgage securities this year. On Wednesday, the Fed expanded that program, saying it will spend as much as $1.25 trillion on such securities in 2009. That is enough to provide funding for more than half of all home-mortgage loans likely to be made in the U.S. this year.

The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing affects mortgage rates.

By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn't been below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and 5.25%. The 30-year rate averaged 4.98% in the week ended March 19, down from 5.03% the prior week, according to Freddie Mac's survey. Fifteen-year fixed-rate mortgages averaged 4.61%, down from 4.64%.
One reason mortgage rates often tick back up after a decline is that a rush of people seeking to refinance quickly causes backlogs at lenders, which frequently don't have enough employees to process all of the applications.

"If lenders are working people overtime to close loans, they don't have an incentive to compete too hard on price," says Arthur Frank, who heads research on mortgage securities at Deutsche Bank in New York.

The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but also wants the banks to make profits on loans so they can return to financial health.
Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned companies, aren't licensed to take deposits and so lack that source of money for their loans. Instead, they typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.

But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big banks and Wall Street firms that used to provide it have exited that business.
Despite these constraints, the Fed's action is "going to be a plus" for the housing market, says Thomas Lawler, an economist in Leesburg, Va. Lower rates make it more likely that home prices will hit bottom in many parts of the country later this year, Mr. Lawler says. The recovery, though, is likely to be gradual, partly because rising unemployment reduces housing demand.
Christopher J. Mayer, a real-estate professor at Columbia Business School in New York, says the Fed's moves to cut rates are "helping to put a floor under the housing market." But he worries that the Fed could face huge losses on the mortgage securities if inflation fears eventually push interest rates much higher.

Still, the consumers who need these low rates the most aren't likely to get much help. Many people can't qualify for these low rates because their credit scores aren't high enough or they can't afford a down payment of 20% or more on a home purchase. Such people will be socked with fees that can drive up their housing costs considerably. Banks also have become far pickier about appraisals and are nixing many purchases as a result.

Others can't qualify for a refinancing because they owe far more on their homes than the estimated current market values. Fannie Mae and Freddie Mac have new refinancing programs that will let some borrowers refinance into lower rates even if they owe as much as 105% of the home value, but only for current loans owned or guaranteed by Fannie or Freddie.

Write to James R. Hagerty at bob.hagerty@wsj.com

Printed in The Wall Street Journal, page C1

Meet the Feds

FED TO BUY ADDITIONAL $750 BLN OF MBS, $100 BLN OF GSE DEBT
FED LEAVES TARGET INTEREST-RATE RANGE UNCHANGED AT 0% TO 0.25%
FED TO PURCHASE UP TO $300 BLN OF LONGER-TERM TREASURIES
FED SAYS INFLATION MAY PERSIST BELOW `BEST' LEVEL
FED SAYS NEAR-TERM ECONOMIC OUTLOOK IS `WEAK'
FED SEES `EXCEPTIONALLY LOW' FUNDS RATE FOR `EXTENDED' PERIOD
FED TO CONTINUE MONITORING BALANCE SHEET SIZE, COMPOSITION
FED VOTE ON MONETARY POLICY IS UNANIMOUS *FED SAYS ECONOMY `CONTINUES TO CONTRACT'
FED TO BUY TOTAL OF UP TO $1.25 TRILLION OF AGENCY MBS IN 2009
FED TO BUY TOTAL OF UP TO $200 BLN OF GSE DEBT IN 2009
FED SAYS TALF TO EXPAND TO INCLUDE OTHER `FINANCIAL ASSETS'
FED SAYS INFLATION WILL REMAIN SUBDUED *FED TO USE `ALL AVAILABLE TOOLS' TO HELP ECONOMY RECOVER

Looks like rates are going lower...

Is Mitt Romney a Racist?

The other day on MSNBC's Morning Joe, Governor Romney continually called the President by his first and last names instead of addressing the office. Instead of saying President Obama, he kept saying "Barak Obama." Even going so far as to call the President by his first name one time.

Is this because Governor Romney is a racist, or because he doesn't believe in our electoral politics?

Rush Limbaugh Wants This Country to Fail

I think Mr. Limbaugh's statements at a political event, are indicative of the Republican Party these days. They'd rather see the President's policies fail so that they can win an election to regain power than do something for this country.

Pathetic. I'd rather both parties try their best to make this country great than spend all of their time setting each other up for failure.