Effect Of New Underwriting Guidelines For Home Loans

In an already difficult housing market, many community associations are worried about attracting buyers to their community. Recently, one of the largest provider of home loans, Fannie Mae, has adopted a new set of underwriting guidelines that have caused an increase in rejected mortgage applications. Some of these rejections have not been the result of poor credit status on behalf of the borrowers. Some of them have been as a result of the financial state of the association.

Lenders are paying closer attention to the financial stability, the reserves and the budget of the association and the management company in determining if they are going to approve a loan application. Fannie Mae is requiring lenders to take an in-depth look at the association prior to underwriting a loan. A lender is now required to warrant that the association has an adequate budget, that the budget provides an allocation to the reserve fund of at least 10% of annual revenue of the association, that the association has funds equal to the amount of the deductibles on their master insurance policies, and that no more than 15% of the maintenance fees are delinquent by more than one month.

Reserve account management is becoming even more important now for community association. Condominiums are now statutorily required by the State of Ohio to maintain adequate reserves, but now, in order to allow borrowers to obtain financing to buy and re-finance within the community, all community associations are going to be forced to look at their reserve policies or they run the risk of losing potential and existing residents who cannot obtain a loan to buy property within the community through no fault of their own. A well-funded reserve account will show that an association is financially stable and healthy, and will be a good investment for the lenders because the association has an active plan to meet its long-term maintenance needs and requirements.

The 10% requirement is currently followed by many associations in the State of Ohio, so many will likely not be affected by this
requirement; however, what it may do is cause many associations to forego the waiver of the 10% requirement by a vote of the association on a yearly basis, as is currently allowed under state statute for condominium associations.

With the rise in delinquencies and foreclosures, the 15% requirement will likely result in more damage to community associations in Ohio than the reserve requirement. Even if an association is aggressive with collection efforts and with its collection policies, the one-month restriction is what will be most difficult to control. Any collection effort takes time to complete and most associations have a grace period. With many associations already struggling with delinquency rates, this requirement may become especially burdensome when trying to attract new owners to buy into their community. Even if a person with great credit wants to buy into the community, the lending may be denied due to the delinquency rates of other owners.

The upside to the new requirements is that with increased pressure from lenders, boards will be forced to reevaluate their policies and ultimately may end up in a better and stronger financial position with sound reserves set aside and with more strict delinquency policies. In addition, the loans that are granted may end up being more reliable, which may help lower delinquency and foreclosure rates within the community.

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