Small-scale investors who own condo units are facing tougher financing challenges as the biggest players in the market are imposing new restrictions -- worse, it seems, every month.

Fannie Mae and private mortgage insurers don't say it this way officially, but their actions make it clear: They don't want to finance condos in large numbers any more, and they are making it increasingly difficult for developers, unit owners and potential investors.

That wouldn't be a big a deal if Fannie were not the number one traditional source of financing for condominium units. Freddie Mac, its smaller rival, has been far less active as a buyer or guarantor of condo loans.

Fannie's latest moves, which took effect March first, ban mortgages in new condo developments where fewer than 70 percent of the units have been pre-sold. The previous cutoff point was 51 percent.

Also Fannie no longer will finance units in projects where more than 15 percent of unit owners are behind on their payment of condo dues, or where more than 10 percent of the units are owned by a single investor, individual or company.

On top of that, Fannie now declines to finance units in buildings where more than 49 percent of all units are owned by investors. Forget most resort area rental condos. Forget condo hotels.

Private mortgage insurers have joined the condo-avoidance bandwagon by either refusing to insure low-downpayment loans in any of dozens of local markets deemed to be "declining," or by charging exorbitant premiums on units in healthier markets.

Even Freddie Mac may soon be following Fannie in restricting condos sharply. It recently raised the minimum downpayment on condo unit loans to 25 percent, and added a three quarter point penalty on top of its regular fees for condos. Fannie also hits all condos with a three quarter point add on.

Fannie Mae now reserves the right to REJECT financing on condo units in projects where -- in its sole opinion -- developers or sellers are offering "excessive" come-ons to buyers, either on below-market financing or other subsidies designed to get buyers to sign contracts.

Fannie says such concessions distort the true market values of the condo units in the entire project.

One glimmer of possibly good news here: Fannie Mae says it is willing to review individual loan on a case by case basis in situations where condo projects don't quite make the grade --- for example, there are more investor units in the building than normally permitted, but lenders will need to submit documentation that the overall project is healthy economically and presents minimal risk.

Published: March 20, 2009

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.