Fannie Eases Condo Guidelines

Fannie Mae and Freddie Mac, known in the lending world as GSE’s (Government Sponsored Enterprises), now fund about 90% of all the residential mortgages in the country. No matter who you obtain your mortgage from, that loan will most likely be sold to either Fannie or Freddie. The lender then uses the funds they get back, to lender out again.

In order for the lender to sell your loan to Fannie or Freddie and get their money back to lend out again, they have to follow certain rules and guidelines established by the GSE’s. For years the GSE’s have had rules in effect that made many condo projects in Hawaii unacceptable, and therefore lenders couldn’t sell those loans to Fannie and Freddie. The big local banks own the market for what are called “non-warrantable condos”.

While the information below may seem unimportant to you, if you own a condo and are thinking of selling it, or are in the market to buy a condo, these new rules could be the difference between getting the best rate available, or getting a higher rate loan. Many of you reading this may find the following to be a little “deep in the weeds”, but for the several thousand real estate agents that are subscribers, please take note.

Fannie Mae announced this month that many of the rules that prohibited them from purchasing loans in condo projects in Hawaii are being changed. Here are the biggest changes:

Single-Entity Ownership
If a single entity owns up to 49% of all the units in a project, so long as you are buying one of those units, they are okay with one entity having such a large ownership percentage. If you are not buying one of those units, the next change below is applicable.

Increased the maximum percentage a single entity can own in a project from 10% to 20%. This is a huge change, as many projects in Hawaii have situations where a single entity owns more than 10% of the units.

Exempts units held by non-profits, affordable housing programs (including units subject to non-eviction rent regulation codes), or institutions of higher education from the percentage of single entity ownership calculation.

Commercial Space
Increased the amount of commercial space a project can have from 20% to 35%. They also no longer count parking spaces in that calculation. This change will help many projects in areas such as Waikiki, Kakaako, and some on the neighbor islands.

Established Project Definition
Allow a new condo project to be reviewed as an “established” project if it meets all the requirements for an established project other than the 90% unit conveyance policy. They’ll allow 80% conveyance if the developer is holding back units as rental stock if additional requirements are met. This will open up more new projects to more lenders versus just the ones the developer says you have to choose from.

Investment Property Transactions
Allow investor transactions to be eligible for a project “Limited Review” by the lender. This is also a huge change, as a limited review will allow more projects to be approved.

Two-to Four-Unit Condo Projects (CPR’s)
Hawaii has many small housing developments that were built using the condo rules instead of subdividing the property. These homes are classified as CPR properties. There’s been issues in the past when you have a project with 4 units or less. There were treated just like the big condo projects with all their rules are requirements. The new rules waive project review requirements, with the exception of some basic requirements that apply