The mortgage market has created a sort of no-man’s land in Chicago with non-conforming financing. A no-man’s land is an area that you don’t want to be. In Chicago, it is selling a luxury condominium priced between $475k and about $650k. Recent changes in mortgage guidelines are going to cause condo units in this price range to fall into a death spiral value wise.
Over the past year, mortgage lenders and private mortgage insurance companies have been slowly but surely tightening up underwriting requirements to minimize risk. In particular, the changes overtly affect loans that are larger than the maximum loan amount that Fannie and Freddie Mac will purchase from banks of $417,000.
For loans larger than $417,000, private mortgage insurance companies (PMI) will not provide insurance coverage. The second mortgage market is all but dried up, so it is nearly impossible to get a second mortgage with combined loan-to-values greater than 85% and even those are hard to come by. In fact, some lenders are just saying no to condominiums altogether. The bottomline is that if you need a loan larger than $417,000 to buy a condo in Chicago, it is going to be damn near impossible to without a 20% down payment.
Herein lies the problem. The buyers…
The typical purchaser of units in no-man’s land tend to be high income young professionals (usually couples). These are buyers who have very high incomes, but generally have not been working a very long time – attorneys, bankers, doctor’s finishing up residencies, etc. They may earn household incomes of $200k plus per year and can easily afford the mortgage debt from a cash flow standpoint, but they do not have a lot of liquid savings available to sink into an illiquid asset such as a home when a 20% down payment is required.
The issue with the Chicago market is obvious. The borrowers who would normally buy all of these high end condo’s downtown cannot readily get financing because of lack of large down payments. They are being forced to save up for a long time if they want to stay in that price range or are setting their sights on cheaper units. The owners of these units in no-man’s land are going to have to drop their prices to make them more attractive to the most borrowers or hope they are one of the lucky ones that appeal to well heeled empty-nester with 20% or greater down payments.
