Every day, we hear different television pundits talking about the imploding condo and real estate market in Florida. Mostly, they attribute the decline in prices to the rampant speculation and uninformed buying of the past several years, the overzealous developers that built more condominiums than were really needed, and the unscrupulous lenders and borrowers that were careless with loans and applications.

While all of this is true, it only tells part of the story. There is a much greater reason that condo prices in Florida have fallen...THE BANKS HAVE CUT-OFF FINANCING!

Fannie Mae is the largest provider of mortgage financing in the United States. They establish different "boxes" of risks for buyers and properties. Buyers in high risk boxes are required to put more money down and receive higher interest rates than their counterparts in lower risk boxes. There is nothing wrong with this system and, in fact, is the way that all free markets establish returns. When your neighbor tells you that they just took out a mortgage on their home for 4.75%, chances are they did this through Fannie Mae.

In the past we only had to worry about getting buyers qualified for financing. Now we also have to make sure that the property itself is qualified and we are finding that to be an impossible task as far as condos are concerned. What many people don't understand is that Fannie Mae also evaluates the underlying property and assesses different risk factors. For example, the hierarchy or risks, from least to most is as follows:

   1. Primary Residences - These are considered to be the least risky. They are purchased to fulfill a need and most people will do everything in their power to make payments on these properties. Buyers get the lowest rates with the least amount of downpayment with these purchases.
   2. Second Homes - More risky than primary homes but still considered fairly safe.
   3. Investment Properties - Considerable Risks. Loan repayments are dependent on rent collected. If the owner experiences high vacancies, they may not be able to make their mortgage payment.
   4. Condotels - Historically, these were small "hotel" style condominiums and considered very risky.

When it comes to condotels, Fannie Mae does not provide financing for them... at least not anymore. The fact is, Fannie Mae never did but recently they have cracked down on what is considered a condotel. During the boom almost any beach front condo in Florida qualified for Fannie Mae financing, but that's not the case anymore.

In fact, the situation has entirely reversed. In 2004 almost every condo qualified for financing. Today, almost none do. So basically, the value of condos are transitioning from a leverage based price to a cash based price.

Since only a small percentage of buyers have cash to pay for a condo, Prices are falling dramatically and will continue to do so unless someone steps in to provide buyers with financing options.

Over the past few years, we have experienced other financing difficulties with conventional loans, FHA loans,and Rural Housing Loans. In each case, Congress and the banks have stepped in with tax credits, lower interest rates, and incentives to relax lending requirements.

These actions have brought many buyers back into the market for homes but there is still one area left for them to address... Condo Financing. Congress will eventually step up and address this issue but in the meantime, seasoned, well-capitalized buyers are now coming back into the market.

They see the opportunity as short term and expect their condo investments to appreciate faster than the home market because of the spike in demand that will accompany relaxed condo lending in the future.  Tim Shepard