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Friday, Oct. 17, 2008 | Kirby Bloom couldn’t sleep.
The 31-year-old senior software engineer for a local genetics research firm decided this year to buy a condo in downtown San Diego. He waded through the short sale process from February to August only to have the seller of the unit back out of the deal at the last minute. Finally, earlier this fall he’d found a unit he liked at Aria, a building finished this year in Cortez Hill. He put $45,000 down on the unit, a 10 percent deposit. Since he’d already been approved for a mortgage when he was planning to buy the short sale, he made the deposit knowing that after seven days, his $45,000 would be nonrefundable even if he couldn’t get a mortgage.
But a couple of weeks ago, his mortgage broker called to say that the worldwide credit crisis meant that banks were tightening their restrictions, especially on new condo buildings. Bloom’s sure-thing mortgage from a few months ago was looking unsure, the broker told him.
“At that point I was freaking out,” he said. “That was $45,000 that I was technically just going to have to push over to the builder just because [the bank] wasn’t going to be able to get me the loan.”
But Bloom’s broker called him Wednesday with some good news. Wells Fargo had approved his financing and he could get his mortgage.
“I was definitely not sleeping very well for a few days,” he said.
But some buyers haven’t been as lucky as Bloom. Some want to buy a condo and can’t because they can’t get a loan. Condos were easy to finance during the boom; an explosion of no-money-down and stated income loans coincided with the upspring of condo towers in downtown San Diego, and buyers and investors and second homebuyers had little trouble finding a bank willing to give them the mortgage to move in.
But those times are history, and banks are reverting to the standards they’d ignored for years. They’ve lost billions of dollars because of loans they made without rigor this decade.
As banks sort out the new credit realities, many are also getting used to new parent banks or mergers, and are tightening their standards to expose themselves to as little risk as possible. For buyers, the path to getting credit is windy and filled with obstacles at this time of great volatility in the financial markets. That’s especially true for condo buildings.
While a buyer might still get a mortgage with just a 5 percent down payment for a detached homes, most banks are looking for at least 10 percent for the buyer of a condo who wants to live in the property. For a second-home buyer or an investor, the thresholds have been raised to 20 to 30 percent down.
The financing issue is tough to swallow for developers eyeing more than 800 finished, unsold condos on the market in the city core. Some buyers have decided it’s the right time to buy a condo but can’t get financing, shrinking the pool of available buyers at a time when downtown sellers are searching for every one they can get.
“Let’s just say that a lot of lenders aren’t able or aren’t willing to do loans on condos,” said Mark Goldman, mortgage broker and real estate professor at San Diego State University.
Though every bank is different, most want a list of assurances about buyers and the building they want to live in: that a certain number of the units are lived in by their owners (usually 50 percent), that the developers of new buildings aren’t going to turn around and rent out the units they can’t sell, that the homeowners association isn’t suing the builder for any reason.
That helps a bank minimize its risk. If a builder has a bunch of empty condos left, the potential exists that he might lower prices or lease out the units. Meanwhile, a lender who made a mortgage on one of the first units could be out money if the buyer ends up upside-down in the unit and walks away.
Before, loan programs were available that didn’t require those guarantees. Now, many banks are going back to those standards. And that question is increasingly having as much to do with the health of a neighborhood or a building as with the perceived ability of the borrower to repay the loan.
“You do sit on pins and needles waiting to see if the lender’s going to approve your stuff,” said Pete Thistle, a real estate agent with 92101 Urban Living who used to be a loan officer in the days of easier-to-get mortgages in downtown. “The guidelines have gotten much stricter. Beyond just getting approved by a bank with good income and good assets, good credit, you’ve also got to look at the condo building.”
One of the biggest unknowns in downtown San Diego new condos is the future of Vantage Pointe, the biggest condo project in the city core, due to be ready for move-ins mid-year next year. Buyers have reserved 288 of the building’s 679 units with a 5 percent deposit, but many of them wonder what mortgages they’ll be able to get when it comes time to close escrow, because fewer than half of the units are spoken for.
“We’re working with our attorneys in San Diego to determine what alternatives we might be able to come up with, and we’re exploring all options at this point,” said Brian Stoddard, president of Calgary-based Pointe of View, the project’s developer.
One of those options would be finding a lender willing to warehouse the loans. That means the bank would make the loans expecting not to sell them to investors like Fannie Mae or Freddie Mac. It could be a risky proposition for a bank.
Or Pointe of View might try to get the building qualified for Federal Housing Administration financing, the program that allows buyers to get mortgages with low down payments.
But the sales agent for the building, Donna Lutz, said it’s too soon to tell what the qualifications will be by the time the building’s done.
“We are so far out from closing in terms of how the market changes every day,” Lutz said. “We can’t give you an answer today for something we don’t know how it will change by then.”
Just a few downtown buildings, including Aperture and Atria, are FHA-approved. When most of the downtown condo towers were built, the FHA program was not as popular as the other low- or no-down-payment options on the mortgage scene, so few developers went through the process of intense inspections and monitoring to get their building on the list.
Bloom, the Aria buyer, said he was frustrated by the idea that he could have his mortgage denied not because of his financial health but because of how the building was doing as a whole.
“What are you supposed to do, when they are not rejecting you because of my own personal finances?” Bloom said. “How much do they want things to get better when they’re making everybody go through all of these hoops? I’m trying to do things the old-school way and they’re making that hard now.”