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Serious Delinquency Rate of Condo Loans Drops to 2.9 Percent in Top 10 Markets

Lowest Since February 2008, but Quadruple 2000-2004 Average

Kristine Yao    |    Mortgage Performance

After the recent housing market crash, condominiums got a bad rap for having higher mortgage default rates, foreclosure rates and total losses. As a result, Fannie Mae, Freddie Mac, and FHA implemented new lending guidelines for condo mortgages that focused not only on the financial stability of the borrower but also on the condo community as a whole. For instance, Fannie Mae’s latest guidelines state the following: 15 percent or less of units can be late on their monthly dues; at least 10 percent of the association’s budget is kept in reserves; half or more of the units must be owner occupied; and no more than 10 percent of units can belong to a single investor1. Freddie Mac and FHA adopted similar guidelines. Fast forward to today: Condo mortgages have the lowest share of seriously delinquent loans2 when compared to other residential single-family property types. While the overall drop in default rates was largely due to rising home prices, completed foreclosures, loan modifications and other home retention efforts, condo’s steeper decline also suggests that mortgage credit is tightest for condos, even as its demand and market share of sales are on the rise. In August 2015, 2.9 percent of condo first liens were 90 days or more delinquent out of the nation’s top 10 condo markets, a sharp drop from the 10.4 percent peak in April 2010 and the lowest since February 2008 (Figure 1).3 In addition, California markets showed the lowest shares overall: Los Angeles-Long Beach-Anaheim CA (1.3%), San Diego-Carlsbad CA (1.3%), San Francisco-Oakland-Hayward CA (0.8%), and San Jose-Sunnyvale-Santa Clara CA (0.7%). The seriously delinquent shares for single-family detached and two- to four-units in the same 10 markets were 4.0 percent and 7.3 percent, respectively. Despite this fall in serious delinquency rates for condo loans, this rate remains 4 times higher than the average during 2000 to 2004.

From 2000 through the beginning of 2007, less than one percent of condo loans were 90 days or more delinquent, coming in lower than both single-family detached homes and two- to four-unit homes. It is important to note that comparisons of serious delinquency rates do not adjust for differing risk profiles and other factors that have traditionally made the condo loan class more risky. Figure 2 compares vintage 2006 and 2014 loan origination characteristics of condos and single-family detached homes in the top 10 condo markets. At the height of the housing boom, condo loans were generally less expensive, had higher credit scores, and were comprised of fewer toxic subprime loans than single-family detached loans. However, they tended to have higher loan-to-value (LTV) ratios with more piggyback loans attached, a bigger makeup of non-owner occupied4 properties, and a greater share of mortgages with low or no income documentation.

Condo borrowers also showed a preference for riskier loan terms, such as adjustable-rate and interest-only mortgages. In comparison, while measures for most risk characteristics declined for the 2014 condo vintage, its non-owner occupancy share rose from 14.1 percent in 2006 to 17.1 percent. This may indicate ongoing vulnerabilities in the market, as the non-owner occupied segment in the past yielded higher default rates. When the housing bubble collapsed, the share of seriously delinquent condo loans surpassed single-family detached in the top 10 condo markets. The condo segment’s higher share of non-owner occupied properties exacerbated the troubles as investment owners were more inclined to strategically default on their negative equity loans. Figure 3 illustrates the increasing spread of default rates between condo investment homes and condo owner-occupied homes during the peak crisis years of 2008 through 2010. By the end of 2009, the serious delinquency rate of condo investment homes reached 12.8 percent, 3.1 percentage points higher than condo owner-occupied homes. Out of the top 10 condo markets, Miami-Fort Lauderdale-West Palm Beach FL CBSA was hit hardest, with over a quarter of its condo loans (and nearly a third of its condo investment homes) seriously delinquent by May 2010. Its recent August 2015 share of seriously delinquent condo loans remains elevated at 6.2 percent.

The decline in seriously delinquent condo loans and a recent pickup in mortgage originations5 signal the early recovery stages for condo lending. However, tighter lending standards, making condo mortgages more difficult to acquire than single-family mortgages, are contributing to the delay in the market’s rebound. Current efforts are underway by mortgage industry leaders to improve and streamline the condo loan approval process, which will help expand this growing market over the next decade.

Data Note: Loan origination and performance datasets are sourced from CoreLogic TrueStandings. The top 10 CBSAs used in the analysis are: Los Angeles-Long Beach-Anaheim, CA; New York-Newark-Jersey City, NY-NJ-PA; Chicago-Naperville-Elgin, IL-IN-WI; Miami-Fort Lauderdale-West Palm Beach, FL; Boston-Cambridge-Newton, MA-NH; Washington-Arlington-Alexandria, DC-VA-MD-WV; San Francisco-Oakland-Hayward, CA; San Diego-Carlsbad, CA; San Jose-Sunnyvale-Santa Clara, CA; and Seattle-Tacoma-Bellevue, WA.

[1] More information may be found on their website: https://www.fanniemae.com/singlefamily/project-eligibility?from=hp.
[2] The seriously delinquent category is made up of 90 days or more delinquent loans, including in-foreclosure, bankruptcy, and REO (real estate owned) loans.
[3] The markets are comprised of the top 10 Core Based Statistical Areas (CBSAs) ranked by total condo open origination dollars and accounts for nearly 60% of the condo market. All additional analysis is based on these markets.
[4] Non-owner occupied homes includes investment homes and vacation homes.
[5] For more information, see http://www.corelogic.com/blog/authors/kristine-yao/2015/10/condo-and-co-op-lending-in-an-upswing.aspx

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