New Fannie Mae Owner-Occupancy Requirements Will Help to Boost Investor Sales

New Fannie Mae Owner-Occupancy Requirements Will Help to Boost Investor Sales

On December 16, 2008, Fannie Mae released announcement 08-34 to lenders around the country. This document contains good news for investors, agents of investors, and lenders who are trying to reduce their REO ("real estate owned") inventory. The good news consists of a loosening of Fannie Mae's owner-occupancy ratio requirements for loans made to investor purchasers of condominiums. Actually, the announcement characterizes itself as a "clarification" of the policy. Whatever.

As it stands, "Fannie Mae requires that established condominium projects consisting of attached units have an owner-occupancy ratio of at least 51 percent... if the mortgage loan being delivered is secured by an investment property." The owner-occupancy ratio is not at issue in cases of "established projects where borrowers will occupy the unit or use the unit as a second home..."

Suppose that a 100-unit condominium project has 45 units that are rentals. Its owner-occupancy ratio is 55 percent; thus an investor could obtain a purchase loan which might then be sold to Fannie Mae.

But suppose, now, that, of the 55 owner-occupied units, eight are lost to foreclosure. (This would not be an unheard of percentage - of the total 100 units - in many parts of the country today.) These eight become REO inventory and are listed for sale. What is the owner-occupancy ratio now? Most of us, I think, would say that the REO properties are not owner-occupied; hence the ratio of owner-occupied units would be reduced to 47 percent. Apparently, many lenders around the country have thought the same way. Based on that understanding, the project would not be eligible for investor financing acceptable to Fannie Mae. In general, that would simply be another way of saying that no investor financing would be available.

As many have noted, a turn of events such as this can easily become the beginning of a downward spiral for the condominium project. For, while it is true that the ratio only applies in the case of investor buyers, there simply are not that many potential owner-occupants who are both motivated and qualified. Even with dramatic price drops, most of the potential buyers are investors. But, giving the understanding about the ratio, they are not eligible for financing. Hence, many of the units are left vacant, and the HOA (condominium association) may find itself short of dues income. (Yes, the foreclosing lender is responsible for paying dues in a timely manner; but they are not always forthcoming.) As more "for sale" signs sprout, the lower unit values drop.

Fannie Mae's December 16th change - "clarification" - is "to include REO units that are for sale (not rented) as owner-occupied units in the owner-occupancy ratio." This means that there will be more sales of these units; and that will be good for everybody.

During the past couple of years, more than a few would-be investor buyers have been unable to purchase condominium units because of the owner-occupancy ratio requirement. Agents who worked with those people should give them a call. There are more opportunities today than there were a few weeks ago.


Written by Bob Hunt
February 5, 2009