Refinance Problem

November 23, 2009 12:40 PM

How can we deal with Fannie Mae/Freddie Mac's rule that, for new mortgages or refinancing in condo buildings with fewer than ten units, one person may not own two or more units if those units are rented out?

In our 8-unit Chicago condo building, Mr. and Mrs. A, who do not live in the building, purchased two units for for the purpose of renting them out. Both units are in Mr. A's name only. The owners of another unit, Mr. and Mrs. B, are trying to refinance their mortgage through Fannie Mae/Freddie Mac. Apparently Fannie Mae/Freddie Mac is now enforcing a rule that, in condo buildings with fewer than ten units, one person cannot own more than one unit if those units are being rented. If Fannie Mae/Freddie Mac agrees to make an exception and let Mr. and Mrs. B refinance, which is unknown at this point, it will cost them an extra $1,000 up front and $200 per month for the life of the mortgage.

An even bigger problem, which will affect all of our owners, is that this new rule will drastically shrink the number of prospective buyers of units in our building. Eighty percent of mortgages are obtained through Fannie Mae and Freddie Mac; therefore, due to the new rule, the vast majority of prospective buyers would be denied a mortgage for a unit in our building. This would obviously make selling more difficult and eventually lower the value of all of our units.

A real estate attorney has advised us that the problem can be easily solved if Mr. A would file a quit claim deed to put one of the units in someone else's name, such as his wife's. Mr. and Mrs. A have resisted our association's efforts to persuade them to file the quit claim, despite the fact that they too will be negatively impacted when they try to sell one of their units. They have agreed to consider it at some point; meanwhile, Mr. and Mrs. B's refinancing has been stalled.

We can't force them to file the quit claim, of course. Any suggestions on other avenues our condo association could pursue?

posted by kim in chicago to law & government (4 comments total)

This is more of a negotiation point than a legal point, but can you/the refinancing owner/the condo association retain counsel for Mr. A at your (not his) cost to advise him on this issue? Can you cover the costs associated with rectifying the issue?

Unless I'm misunderstanding your scenario, Mr. A will NOT be subject to the rule when he tries to sell--if he sells 1 of his units to a new buyer, that new buyer would not be buying into a building where 2 or more units being rented out by the same person. So unless someone else buys two units for renting out, Mr. A is not going to have any incentive to bear these costs himself. IANYL, this is not legal advice, etc.
posted by Admiral Haddock at 1:09 PM on November 23, 2009

Just thinking aloud here, could your real estate attorney look into having the deed transferred to a single-member LLC owned by Mr. B? Does that change the result? That way, Mr. B would not have to transfer title to his wife. One would have to consider the costs involved, though--at least here in Massachusetts, there is a $500/year annual report fee to the state; not sure what the costs would be in IL. You should also update your condo association agreement to ensure this scenario can't happen again. IANYL, this is not legal advice, etc.
posted by Admiral Haddock at 1:18 PM on November 23, 2009

Mr. A has very little incentive currently to change anything. He's not the one trying to refinance, and who knows what their marriage is like. He may have a reason to actively wish to avoid having the condo in his wife's name.

Can the condo board vote to modify the CC&Rs so that you assign some kind of fee or penalty to anybody who is trying to rent out more than one unit? I don't know if that can be done retroactively or not. You'd want to consult with the board's attorney. If you can do that, you can apply pressure to Mr. A that could force him to shift assets to somebody else's name or sell the units entirely. You'd obviously need the support of the board for that.
posted by willnot at 2:56 PM on November 23, 2009

Thanks to all of you for your input.

Even though it seems like Mr. and Mrs. A will not be negatively affected by the situation they have created, a real estate attorney said this would impact them when they try to sell, i.e. their potential buyers could not get financing through FannieMae/Freddie Mac.

The other board members and I could definitely make a new rule or change the bylaws so that in the future no one can rent out more than one unit, but I'm not sure we could make it retroactive or impose a fee/fine/penalty on Mr. and Mrs. A. It's worth checking into, though.

Thanks again.
posted by kim in chicago at 9:13 AM on November 28, 2009