Hunter Palmer

Since I am getting so many questions these days regarding condos and condo-tels and since the secondary market for these properties, i.e. Fannie and Freddie, has all but disappeared, I thought I would try and clarify why a project will or will not fly. First, a condo-tel is not a new concept. It has always been a type of property designation we use along with single family detached, duplex, etc. The problem is that for many years, Fannie and Freddie did not adequately identify beach-front, resort-style condominiums for what they really were. So what makes a condo-tel? Actually, any number of things. I have heard many times that a project is not a condo-tel because it doesn’t have an on-site rental desk. While an on-site rental desk would classify a project as a condo-tel the absence of one does not make it immune. If they have a website that advertises rentals it is a condo-tel. If an owner is required to rent per the bylaws it is a condo-tel. If it has daily maid service it is a condo-tel. So if a project doesn’t have any of these things then it is okay with Fannie and Freddie and fixed-rate financing is available? Not necessarily.

There is another classification we use for condominiums and this is the term ‘warrantable.’ Warrantable refers to whether it can be warranted as sellable to Fannie or Freddie meaning it meets their criteria for an acceptable condominium project. So what makes a condominium ‘non-warrantable’? If the developer is still in control of the HOA it is non-warrantable. If more than 50% of the units are investor owned it is non-warrantable. If one entity owns more than 10% of the total units it is non-warrantable. If the project has pending litigation against it or if a large percentage of owners are delinquent in their HOA dues, or any number of other factors cited by the appraiser can lead to a project being classified as non-warrantable. Every once in a while we come across a project that we can warrant but they are rare to say the least.

Between a project having one or more condo-tel attributes or having one or more of the non-warrantable attributes, you can see that most every condo here on the beach has no secondary market financing available. This is why a few banks like Vision have developed alternative vehicles to get these properties financed. Our portfolio 3/1 and 5/1 ARMs are not a panacea. Yes, they carry a certain amount of risk and the rates are at a premium over the current thirty-year fixed-rates, but, in the absence of a secondary market, these ARMs are the best alternative for providing financing to the buyer while protecting the bank from interest rate risk and meeting our future capital requirements. It is our hope that in there will eventually be a thawing in the secondary market for condos and that our products can provide a bridge to that future. In the meantime, we will continue to lend on these properties because we have a vested interest in seeing them sell and we have a firm belief that the collateral is sound.

Thirty year mortgage rates have been attempting to push through the 5% ceiling over the past few days as continued gains in the stock market have beaten up on bond prices. Jumbo rates remain frustratingly in the 6.875% range stifling any potential recovery in the high-end home sector. Government loan rates for thirty-year mortgages are now all in line with conventional rates hanging right around 5% for the past several weeks for VA, FHA and Rural Development. High-rise condo financing remains extremely difficult to obtain here in Florida though some local banks are offering in-house portfolio ARMs such as my 5/1 and 3/1 to try and help second-home buyers take advantage of the incredible deals out there right now.

We’ve had some more mixed news on the housing front as builder confidence sank to an eight-month low while the NAHB/Wells Fargo Housing Opportunity Index showed an increase in home affordability in the first quarter to 72.5% making it the best time in two decades to buy a home. HousHousing Starts

Housing starts for April fell 12.8% but, upon closer inspection of the numbers, most of that decline was in apartment and condominium construction while single family home starts actually ticked up slightly for the month.

One last note of interest…HUD has backed away from its earlier consideration of allowing local government and banks to make short-term bridge loans to first-time homebuyers for their $8,000 tax credit to use as a down-payment for the purchase of a home with a federally insured mortgage. HUD officials, upon closer examination of the proposal, felt it too much resembled the seller-funded home-buyers assistance programs of days gone by. Federally insured mortgages which allowed for the borrower to receive gift funds under these programs defaulted at three times the average rate. FHA now requires that all borrowers make a minimum down payment contribution of 3.5%. This supersedes the recent legislation passed in the Florida legislature to allow for such programs.

Mortgage rates have remained, quite remarkably, in a narrow range - remaining below 5% despite the ten-year Treasury note taking a beating for the past week with the yield now at 3.14% The reason this is remarkable is that the ten-year yield has risen 75 basis points over the past several weeks while mortgage rates have barely budged. Normally we would see a tight correlation between the two but these are hardly normal times. Rates have, instead, been held down by Federal Reserve actions that have balanced a healthy demand for mortgage-backed securities with government debt auctions needed to raise dollars for everything from fiscal stimulus to government bail-outs. I admit I am a little surprised that mortgage rates have remained so low but I certainly am not complaining.

More positive economic news on the housing-front this week as the National Association of Realtors reported that pending home sales rose by an unexpected 3.2% in March. The Commerce Department also reported that construction spending in March rose .3% which may not sound like much but it is far better than the 1.5% decrease analysts had expected. Many economists are now saying the market is “testing the bottom” as home inventory has now fallen just under a ten month supply and pent up demand could squeeze inventories further in the months ahead.

While we wait for the results of the Government’s “stress tests” for the nineteen largest U.S. banks, it appears that banks are now at least more willing to lend to each other. The three month LIBOR index fell below 1% for the first time ever on Tuesday. This is the most common rate index for measuring the rate of liquidity in the financial system. In contrast, the LIBOR exceeded 6% back in September as banks were refusing to lend to each other over fears they would not be able to repay. If the majority of the large banks pass the “stress tests”, or at least don’t fail them, a renewed confidence in the health of the financial system should further lubricate the credit markets.

This past week saw a mixed bag of economic news that had mortgage rates in a quandary. Positive reports on new and existing home sales along with signs of a slowing in the rate of home price decline signaled a possible recovery in the housing market that put upward pressure on rates. These reports were tempered, however, by the Mortgage Bankers Association’s release of its weekly mortgage application index which fell to 960.6 lead by a 21.9% drop in refinance applications. Purchase applications, on the other hand, fell by only .6%. Consumer confidence surged by more than analysts had expected leading many to believe consumers may be willing to open their pocket books in the coming months. Consumer spending will be crucial if we the second quarter is top the first quarter’s dismal GDP which fell by a whopping 6.1% in the first quarter. Economists had expected a drop of 4.7% All of these mixed signals have combined to leave mortgage rates basically unchanged since last week despite daily volatility. The thirty year fixed-rate stands right at 4.875% and the fifteen year stands at 4.375%. We have one new wild card in the mix as the threat of a global pandemic from the swine flu has markets world-wide somewhat rattled. If the outbreak becomes more widespread and serious in the coming days, this could hurt global markets and give a boost to bonds and help ease rates further.

More good news on the housing front this week as reports on new and existing home sales both beat analysts’ expectations and showed signs of a bottoming despite a monthly decline for March. Possibly the best news this week was Wednesday’s report from the Federal Housing Finance Agency showed home prices actually edged up .7% from January to February for single family residences. These encouraging housing reports coupled with some better than expected corporate profit reports have reignited the stalled rally on Wall Street sending stocks higher for the week. The gains for stocks, however, came at the expense of the bond market with the ten-year Treasury note getting pounded sending the yield to right at 3% in Friday trading. Mortgage rates, while slightly higher, have managed to resist the rise in bond yields thanks to the Fed’s ongoing program of purchasing up to $750 billion in mortgage-backed securities. Rates remain near record lows and we are even beginning to see some relief in the Jumbo market where rates have remained stubbornly close to 7% for thirty-year fixed.

I have some interesting anecdotal news this week as well. I actually had two bidding wars break out this week over a condo and a single family home I was trying to finance - something I haven’t seen since before the crash. This further convinces me that this market has bottomed and is on its way back up. I am seeing more appraisals make value and, better yet, come in above sales price, which is another sign of a resurgent market. The challenge remains the strict underwriting standards and shortage of loan programs that have choked off what would otherwise be a flood of business. I am closing primarily condos but, for every ten applications I take, three may go beyond the pre-approval stage and actually close due to the limited financing options available. Yet as more and more of these deals get closed, and as more buyers rush to snap up the bargains before rates begin to rise, the crippling “distressed market” designation should eventually be lifted for Florida real estate. This is crucial to providing our potential customers the same access to the mortgage programs and less-stringent underwriting guidelines enjoyed in our neighboring states.