Residential: Providing a runway for growth in condo lending

Condominium lending is poised to capture an increasing share of mortgage originations in the coming years as millennials, first-time homebuyers and a growing number of seniors seek out affordable housing options after 86 months of year-over-year gains in median existing-home prices.

“Lenders and investors have already started to make policy adjustments to accommodate anticipated growth in this segment of the market,” said Megan Bartlett, Vice President and Managing Consultant at The Collingwood Group.

Recent research from CoreLogic explored the state of the condo market in-depth, noting that despite consistently accounting for roughly 8% of total mortgage originations, condos sales are taking off in high-cost areas, such as Washington, DC, and Hawaii, where they account for around 40% of the market.

CoreLogic cautions, however, that lenders may find condo lending “unnecessarily strict.” The market has already begun to tighten with the average condo staying on the market for 60 days, the shortest time recorded in the nearly two decades that CoreLogic has been tracking the data.

Last year, in response to growing demand, Fannie Mae and Freddie Mac revised their condo policies. “We’ve already seen how effective a few minimal tweaks have been at providing meaningful credit to homebuyers,” said Bartlett.

In 2018, the government-sponsored enterprises (GSEs) raised commercial space allowances to 35%, up from 25%, relaxed and streamlined underwriting requirements for smaller developments and lower loan-to-value (LTV) loans. The changes contributed to an uptick in the origination of conventional condo loans.

“The finalization of the Federal Housing Administration’s (FHA) condo rules could ease requirements to open up the condo market further,” said Bartlett.

Industry groups, including the National Association of Realtors and the National Reverse Mortgage Lenders Association, urged the Department of Housing and Urban Development (HUD) to update its condo policies in a letter sent earlier this year. The letter notes that as of January 2019, FHA has approved about 18% of condo project applications, with 42,983 applications still outstanding.

During recent remarks before the National Association of Realtors, Commissioner Brian Montgomery suggested that FHA may be ready to take up the issue.

“We’ve been in the process of revising our condominium project approval requirements to get to a final rule and update our policies,” said Montgomery. “We anticipate that the updated regulations will be more flexible, less prescriptive and more reflective of the current market than existing provisions.”

The Office of Management and Budget (OMB) is reviewing FHA’s final rule.

“More flexibility would certainly go a long way in facilitating the continued stable growth of this important affordable housing option,” said Bartlett.

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