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24 | Th e M Rep o RT Feature C ondominiums are in again. And this housing category is expected to be a continually growing opportunity for the mortgage industry. Why? As urbanite millennials begin to form new households, they're finally making the move from renting to buying. Unfortunately, the current pro- cess of determining condo project eligibility for investor purchases is fraught with inefficiencies that eat up time, raise costs, and increase buyback risk. But efforts are un- derway to streamline this process by introducing more standardiza- tion, rationality, and technology. Almost Back to Their Peak T here are roughly 8 million condo units in the United States. In 2014, condo sales ac- counted for 12 percent of all sales through the first 11 months. This was very close to the peak of 12.7 percent reached in 2005. Many observers expect that the coming of age of the millennials will also usher in the golden age of the condo mortgage market. Today, millennials represent 24 percent of the population, roughly the same size as the baby boomer generation, and that percent is growing. Last year, the Nielsen Company came out with its report "Millennials–Breaking the Myths." Here are some highlights: • "Millennials like having the world at their fingertips. With the resurgence of cities as centers of economic energy and vitality, a majority are opting to live in urban areas over the suburbs or rural communities." • "Sixty-two percent indicate they prefer to live in the type of mixed-use communities found in urban centers, where they can be close to shops, restaurants, and offices." • Milliennials "are currently liv- ing in these urban areas at a higher rate than any other gen- eration, and 40 percent say they would like to live in an urban area in the future. As a result, for the first time since the 1920s, growth in U.S. cities outpaces growth outside of them." • "The markets where millenni- als are most highly concentrated reflect their desire to live in more socially conscious, creative environments. Austin, Texas, has the highest concentration of this group—almost 1.2 times the national average—and fits the millennial ideal, combining urban convenience with an exciting art and music scene. Within Austin, most millennials are found near the city core and less in the suburban and rural areas." Given this generation's prefer- ence for urban living, and their smaller personal balance sheets, condos are a natural choice for their starter homes. $80 Billion Lending Opportunity and Growing F rom a lending perspective, con- dos represented approximately 8 percent of the U.S. mortgage mar- ket in 2014, accounting for roughly $80 billion. Last year, the GSEs and the Federal Housing Administra- tion purchased or insured the vast majority of these loans. Ah, but here's the rub. In order to qualify for GSE or inves- tor purchase, condo units must be part of projects that meet a certain set of eligibility standards. For instance, a project could be considered ineligible if: • There are too many unsold units in the project. • The project has too much com- mercial space. • A single entity owns too many units in the project. • More than 15 percent of HOA dues are seriously delinquent. • The project is being sued. • The project is a condominium hotel, or condotel. To determine whether or not a project is eligible, lenders must take a number of steps that include: • Finding and contacting the condo owners association (COA). • Sending a questionnaire; re- questing documents that cover insurance, budget, and legal in- formation, among other things; and paying fees to the COA. • Reviewing the information and deciding on the project's eligibility. Sounds easy enough, right? But in practice, it's often a frustrating, time-consuming, expensive, and ultimately risky exercise. $600 Plus 3 Weeks Per Loan T o begin with, there are roughly 140,000 COAs in the United States—more than 80,000 of which have five units or fewer. Smaller projects are often self- managed, making them tougher to find and slower to respond. Once a lender has identified the right COA, the next step is send- ing a questionnaire. Condo Share of Homes Sales Approaching Pre-Recession Levels YTD Credit: 2014 CoreLogic, Inc. All Rights Reserved