by Joe Savage, Real Estate BrokerA leading factor in price appreciation in real estate is the availability of credit. Buyers have to have good credit histories or they can't borrow the money for a mortgage. Lenders must be solvent and have an appetite for the risk a loan represents. These days, banks make very few residential mortgage loans which they actually keep on their books. Rather, they sell the loans to the "secondary market" to make an immediate, albeit smaller profit and get their loan money back so they can loan it again.
These days, since the collapse of the "shadow banking industry," this secondary market is dominated by Fannie Mae and Freddie Mac, the Government Subsidized Entities (GSE). This becomes an issue which affects condo property values because a lender must feel that a particular condominium is warrantable; that is, it will meet the high underwriting standards set by the GSE's, or they won't loan for purchases in that complex. Their reasoning is simple: If a lender originates a loan on a property, and sells that loan to one of the GSE's, and on the loan's review the property is found to be unwarrantable, the GSE will make the lender buy the loan back. This is a very undesirable situation for mortgage originators.
The GSE's have neither the manpower nor the organization to inspect every condominium. Therefore, they develop guidelines that assist lenders' underwriters to determine if the complex is warrantable. From these guidelines, lenders construct a "Condo Questionnaire" which is forwarded to the Home Owner Association (HOA) or its manager for completion. The success of a condo sale can often swing on how this questionnaire has been completed, as well as how the underwriter interprets the results relative to the GSE's guidelines and the level of "compliance risk" that any variances might represent.
This and the following two articles will discuss the key issues addressed in typical Condo Questionnaires and how they affect the underwriting decisions, and thus property values. If you can't finance a purchase easily, sale prices adjust to accommodate cash purchases, higher interest rates, higher down payments, or all three.
Besides wanting to know where a condominium is located physically, the questionnaire seeks to determine the completion status of a condominium and its governing body…its HOA. Questions amenities and other common elements and areas. There are often questions about whether the particular HOA's amenities are owned by the HOA fee simple or are leased from the developer or some other third-party. The GSE's don't want to loan on a condo that isn't fully built-out, isn't in the control of its homeowners, or may be unduly subject to the vicissitudes of leasehold arrangements for its amenities.
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