Today in the (ever smaller it seems) Business Section of the Richmond Times-Dispatch, there is an article about the difficulties being faced by the Miller & Rhoads condominium project. I haven't been in the Miller & Rhoads units myself, but I have several developer friends who have and say the quality is VERY high and the units are attractive and well-designed. So I am glad the article actually gets it right - it's not the project, it's the financing, stupid!
Trust me, I feel their pain. In this market, be you a Realtor or a seller, selling anything is tough. Make that something you're selling a condominium, and it gets even tougher.
Why is that, you might ask? Well, the federal government, in its imminent wisdom, has decided to severely limit what condominium projects will be eligible for federal backing through Fannie Mae and Freddie Mac. In other words, unless the condominium project meets very strict guidelines, any loans made for an individual purchaser do not comply with federal guidelines, and cannot be packaged and resold as mortgage-backed securities ("MBS") in the secondary market.
What are the federal guidelines for Fannie and Freddie approval? Well, a condominium project (i) has to have a certain percentage of the units sold; AND (ii) has to have a certain percentage of those sold units owner-occupied, meaning units purchased by investors do not count.
So.....major institutional lenders - think Suntrust, Bank of American, Wells Fargo - are not going to lend for buyers in these condominium projects unless and until they meet the Fannie and Freddie guidelines. Big banks are big organizations that have to have specific policies and procedures.
What does that mean if you are a NEW project like Miller & Rhoads that has just come on the market post-real estate market collapse? Either you have to find cash buyers (the Holy Grail these days in the real estate world) OR you have to get a local lender that believes in the project to set up a "portfolio loan program." In a portfolio program, a local or regional lender will lend to buyers who want to purchase in the project, based on an evaluation of those buyers' credit scores and income, and the lender will hold those loans on its own books, collecting interest, rather than selling the loans off into the secondary market for bundling into MBSs.
Phew. It's enough to make anyone's head spin, even people that do this for a living. Perhaps I'll write more later on WHY the government has decided to take this approach, which is really a risk-reduction strategy. I'll give you a hint. Think of all those failed condominium projects in Florida, Nevada, and California that the government is now holding essentially worthless paper on. But for now, I've got to get out and try to sell some condos!
This is not happening in a vaccum. Consider the white elephant corporate welfare projects that surround this particular condo project. The Convention Center, Center Stage, the Broad Street CDA- all of these entities are struggling and have not met their cheerleaders' promises. Why would banks, realtors, or regular citizens believe in these condos as investments? Everyone is looking for sustainability and security.
Posted by: Scott Burger | September 23, 2009 at 01:52 PM