Condo Financing Issue Coming Soon

Do you remember that horrible accident in Florida a few years ago where a large portion of a condo project collapsed and killed 98 people?  The ramifications of that disaster are now coming to light as Mortgage Juggernaut Fannie Mae looks at ways to mitigate risk in poorly maintained projects.

 

In lending, everything has to do with risk.  Risk if the borrower will pay as agreed.  Risk if the project will be maintained.  No one ever thought about risk if the project remained standing.  Due to that disater, Fannie Mae has instituted new policies that take effect in August.  The result of those polices will reduce the number of local Hawaii condo projects Fannie Mae will purchase a loan – meaning alternative channels of financing will need to be made available.

 

Among many of the rule changes, the one that affect Hawaii condos the most has to do with owner-occupancy.  In simple terms under the old rules, if you were purchasing or refinancing a condo as an owner-occupant and putting a minimum of 5% down (or have a minimum of 5% equity), your lender could perform a “limited review” of the condo project to confirm it met the requirements for Fannie Mae to purchase the loan.  The limited review was a clever way of saying “don’t tell us, and we won’t look”.  Starting in August the limited review has been eliminated.  Each loan will now require the lender to perform a “full review” of the project to confirm it meets the minimum requirements for collateral requirements for Fannie Mae to purchase the loan.  The translation: “tell us everything, and we will look to confirm”.

 

Fannie Mae believes that low owner-occupancy adds greater risk to the overall long-term required maintenance of a project.  The belief is that with a higher level of investors the condo board will focus on keeping maintenance fees low providing better cash-flow for investment units.  Therefore, if a project doesn’t have a minimum of 51% owner-occupancy, Fannie Mae won’t buy the loan.  That requirement is for all occupancy types, owner-occupant, second-home, and investor.  They also want the budget and reserves reviewed.  If the condo association is not collecting enough funds for maintenance and to fund the reserve account, that’s another no-no, and they won’t buy the loan.

 

Here’s what this means for you the consumer, or if you are an agent (selling agent or buyer’s agent).
The make-up of ownership along with how the condo project is managed has become as important as location and amenities.

 

Being a lender, you would think I would be against this action.  I think arbitrarily setting an owner-occupancy percentage is a dumb way of screening out poorly run condos, as owner-occupants on fixed incomes complain far louder than investors about rising HOA fees.  I can tell you first-hand as a former condo board president, that the pressure from owner-occupants to keep monthly HOA fess low is intense.

 

As I’ve written before when discussing the condo insurance crisis of 2024, many Hawaii condo projects failed to adequately insure their projects because of a backlash from owners about huge increases in monthly HOA fees.  Many projects decided to violate their own bylaws and stuck with insufficient insurance coverage.  Lucky, we didn’t have a hurricane or some other natural disaster!

 

A condo is unusual, as it is a form of housing where the owner abdicates the responsibility for maintenance to others they most likely don’t know at all.  I have consistently advocated for years that owners must attend board meetings to make sure their board is protecting your interests.  Prospective buyers need to read the giant stack of condo disclosures themselves to get a sense if the project is well maintained.

 

If you are a condo owner, I suggest you go to a board meeting and ask them how they determine the amount of funding for repairs and maintenance of the project.

 

Fanie Mae is now drawing a line in the sand.  They will force lenders to do the research you the consumer may not have done.  How will this affect you?  If Fannie Mae doesn’t like your project, the good news is that there are other lenders willing to take greater risk.  But the old saying is that “higher risk equals a higher rate”.  Yes, you’ll still be able to obtain financing, but it may not be at the best rates available.

 

 

 

 

Recycled Information

I recently completed repairs to my home from a storm last year.  The final step was replacing the damaged copper gutters with new.  My contractor was kind enough not to keep my old material and instead left it strewn about for me to pick up and recycle myself.  Catch the sarcasm?

 

I took what was in my mind a heavy garbage can full of copper gutters, downspouts, and hardware to my local recycling center in East Oahu.  Before I could dream of how much money I would receive, that bubble burst because I didn’t have a notarized form stating where I got the copper from.

 

For those that don’t know or remember, Hawaii’s poor and addicted population had a bad habit of stealing copper wire to fund their need.  A famous case from a few years ago on the H-1 freeway had thieves steel maybe $100 worth of copper wire from the freeway light system.  The cost to fix the damage was nearly $4-million dollars.

 

Copper wire is one thing, but copper gutters?  Just keep this in mind: If you plan on recycling any copper material at Hawaii’s recycling centers, stop by first and get the form.  You’ll need to get a notary to complete the form.  Otherwise, the center can’t take it.

 

Something I wasn’t aware of, but now you are….

 

 

 

 

And now the week’s economic news…….

 

Job Gains Fall Short

Financial markets continued to be sensitive to energy prices this week, but oil prices remained relatively stable. The biggest economic news came from the June employment report, which was significantly weaker than expected. Despite mostly positive news for mortgage markets, however, rates ended the week slightly higher, mostly due to portfolio adjustments on the last day of the quarter.

 

The U.S. economy added just 57,000 jobs in June, well below the consensus forecast for a gain of 115,000 and the fewest since February. Revisions also reduced payroll estimates for the previous two months by a combined 74,000 jobs. Hiring was strongest in professional services, social assistance, and healthcare, while leisure and hospitality experienced notable job losses.

 

Wage growth remained moderate, with average hourly earnings increasing 0.3% for the month, in line with forecasts. On an annual basis, wages rose 3.5%, up from 3.4% the previous month (the slowest pace of growth since May 2021) and below the current inflation rate. The unemployment rate unexpectedly declined to 4.2% from 4.3%, but the improvement was not entirely encouraging. The drop was largely driven by people leaving the labor force rather than stronger hiring. This can be seen in the unexpected decline in the participation rate (the percentage of working-age people in the labor force) to just 61.5%, the lowest level since March 2021, suggesting softness in the labor market.

 

The latest JOLTS (job openings and labor turnover rates) report, covering the month of May, presented a more resilient picture for that period. At the end of May, there were 7.6 million job openings, well above the consensus forecast of 7.3 million and the most since May 2024. There were 1.04 openings for every unemployed person, up slightly from a year ago. More openings suggest that companies face greater pressure to raise wages to compete for available talent.

 

Another closely watched component of the report is the quits rate, which measures the percentage of people voluntarily leaving their jobs. In May, the quits rate was 1.9%, roughly the same as one year ago, but down from a peak around 3.0% in early 2022 during the post-pandemic labor market surge. Generally, workers are more likely to leave their jobs when they are confident in their ability to find a better opportunity. Overall, recent labor market data continues to suggest a slow pace of both hiring and firing.

 

 

 

Next Week

Looking ahead, attention will remain fixed on the conflict in the Middle East and the proposed deal to ease tensions. Investors also will monitor comments from Fed officials about future monetary policy. The detailed minutes from the June 17 Fed meeting will come out on Wednesday. For economic data, the ISM national services sector index will be released on Monday and Existing Home Sales on Thursday.

 

Until next week….

 

*** Please note that Freddie Mac publishes their weekly rate report on Wednesday mornings from data received Monday and Tuesday. 

The graph above is intended to shown rate trends, and not “today’s current rate”. ***

 

 

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