Building Boom: A Community Grows Outside of Fannie Mae Financing

Heather Smith's picture

My first home was my dream.   A newly rehabbed condo right on the beach and a block from transit.   The developer owned the building for 12 years and he and a work crew were slowly transitioning a former rental building into condos, doing 3-4 units per year over ten years.  Some long-time tenants were moving upstairs or across the hall while their homes were being rehabbed and turned into condos. They made the transition into homeowners.   It was 2002 and all signs pointed towards owning as the American Dream.  I signed a contract and applied to my bank for a mortgage.

However after six months of waiting for my application, the bank rejected my application because the building didn’t meet “Fannie Mae and Freddie Mac ownership standards of 75% owner-occupied. ”  In other words, I was being penalized because I was part of the first wave of owners in the building.  Penalized because there was still a work crew in my building that fixed any problems.  Penalized because the developer was doing the right thing by allowing current tenants to remain in the building.   I found a new enemy in Fannie Mae that day.

I stood at the corner of LaSalle and Monroe, in the heart of Chicago’s financial section in the sweltering August heat, tired and worried.  I looked around at the three different banks on four corners and simply picked one.   As it turned out, the bank I picked was a private bank.  Their clients were wealthy with all kinds of ownership structures from co-ops and rental buildings to 2nd, and 3rd and 4th homes.  When I asked tentatively if they dealt with Fannie Mae and Freddie Mac, the loan officer said, “No, your loan will remain with us for the life of the loan.  We do not sell our mortgages.”  

This line would become my economic beacon over the following years.  Although many private banks adopt even stricter restrictions than federal guidelines, I considered myself lucky and always went back to this bank because I knew I could count on them to recognize the inherent value of my home without consulting Fannie Mae homeownership standards.    Over time, many more units sold and our community of tenants has turned into a mix of owners and some renters.    This experience reveals the tremendous biases and subsidies for home ownership directly from the federal government.  

When the 2008 economic storms came, many people rented out their units.  The developer had not finished selling all of the units  and started renting out the remaining ones as well, waiting until prices get better to sell.  And guess what?  The diversity of rentals and owners is a good thing. That is what has kept our assessments coming in: the diversified mix of ownership and rental.  As the news media reported on how mortgage companies sold pools of mortgages leaving owners with little idea who they should pay or consult, it made me even more grateful for my bank.   I enjoy the stability of paying my mortgage to the same bank with the same address every year.

As for my building, we are about 50% owner-occupied.  We’ve never felt “threatened” by rental units as the federal government’s restrictions imply. It is simply a different way to pay the bills.   It is because of the rental/owner mix that my building had a resilient source of income to feed the association throughout the economic crisis.   And I get the benefit of a diverse set of neighbors with which to mingle and share ideas, in a setting enhanced by its urbanity.  As economist Ed Glaeser shows in his Triumph of the City, cities foster creative entrepreneurship and invention.  

CNU is joining forces with a number of partners to change Fannie and Freddie standards to support innovation and allow creative financing, mixed uses and a diverse building stock.  The odds were stacked against my neighbor and developer, yet he has achieved a dream of a great community and wonderful building that has proven even more economically viable than your average condominium.   As this experience shows, we shouldn’t have to follow the federal rules or biases, and they can lead us into financial trouble.   My lesson? I don’t need or want Fannie Mae as my neighbor.





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