The Three Percent Solution

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Th e M Rep o RT | 25 Feature According to some of the country's leading condo lenders, once the proper COA is identified and a questionnaire sent out, the turnaround times can easily stretch beyond three weeks. The whole process, they estimate, can add as much as $600 to the cost of each loan. That's why it's called chase- and-place. It takes time and expense to locate the COA, send and receive questionnaires and documents, resolve discrepancies, and manage payment of disparate fees to the COA and property managers. Asking Different Questions, Getting Different Answers U ntil recently, there was no standard set of questions to determine condo project eligibil- ity; every lender had its own questionnaire. Last year, CoreLogic conducted an extensive review of various questionnaires and found signifi- cant differences in the questions being asked and the possible answers that they might elicit. Remember the prohibition of one entity owning too many units? Here are the very different queries asked by three separate lenders to obtain seemingly simple information: • Does any one person own more than one unit? • Does any single entity, individ- ual, or group own more than 10 percent of the total units? If yes, please list name and num- ber of units. • Does any investor, individual, partnership, or corporation own more than 10 percent of the total units in the entire project? If yes, what percentage? If fewer than 10 units in project, please complete. Do legal documents include procedures for arbitra- tion in the event of a spilt vote and/or to facilitate disputes? Certain investors won't buy loans if more than 20 percent of the total square footage in a project is devoted to commercial. Here's how three other questionnaires tried to solve for this equation: • Does the project contain any commercial space? If yes, explain (type of business/square footage). • Does the project contain any commercial space? You may answer no if the commercial space comprises no more than 20 percent of the total space AND the commercial use is compatible with the residential nature of the property. • What is the total number of commercial units? What is the number of total units? As you'd imagine, it's easy to reach the wrong conclusions based on these questions. Also, lenders have no easy way of veri- fying whether the data they are receiving is accurate. Is There a Better Way? T hat's the question that many of the largest condo lenders have been asking for years. Sure, they've developed one-off work-arounds that provide some level of comfort. But they know that even after the delay and costs relating to identifying and interact- ing with COAs, ultimately they are still exposing themselves to buyback risks. Just imagine if a condo loan later goes into default, the project is determined to have been ineligible, and all of the loans in that project must be repurchased. For the past year, CoreLogic has been working closely with large lenders, secondary market investors, and condo association groups to apply technology and standardization to this process. Last May, we hosted an indus- try-wide meeting of stakeholders in Washington, D.C., and shared the first phases of a new condo project eligibility solution. It draws on our property databases and applies sophisticated spatial/parcel data-mapping technology to link condo units to their appropriate COAs, which makes the chase- and-place process faster and easier. At the same time, we also un- veiled a standardized, copyrighted questionnaire that captures the most common guidelines for the secondary market investors and loan insurers, such as the GSEs, the FHA, and the VA. This eight- page questionnaire—reviewed by the large investors and com- munity associations—categorizes and gathers 12 types of project information critical to underwrit- ing condo projects. Later this year, we have plans to introduce historical alerts and project data validation to our solution. Historical alerts will tell lenders how the project health is trending over time, for better or for worse. For example, we will alert lenders if the number of unit owners delinquent in their association fees is increasing over time or whether the number of renters is going up. Project data validation will help lenders sup- port the reps and warrants they make to investors by showing them whether or not there is a difference between the informa- tion provided by the COA and other trusted data sources. If this solution is adopted—cur- rently several lenders are beta-test- ing it—it will eliminate much of the hassle of chase-and-place; simplify information collection for lend- ers, investors and COAs; and help lower the risk of loans not having to be repurchased at a later date. After all, it only makes sense to use data and technology to better serve the needs of a generation that lives and breathes technology. What a concept! Jacqueline Doty is vice president of industry solutions at CoreLogic. She can be reached at Condo Unit Concentration

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