Possibly driving a stake through the heart of an already moribund condo industry, Fannie Mae today severely tightened its lending criteria.

From the WSJ:

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won’t back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

Rest assured that very few new condo developments are going to be able to meet these hurdles in the near future. Don’t, however, jump to the conclusion that Fannie is being overly conservative at a time when aggressive lending is needed (I’ll bet we hear something like that from Barney and his cohorts over the next few days). These criteria are very close to the standards that they used to adhere to before everyone lost their collective minds. They represent responsible underwriting to my mind.

One result of this tightening might well be to spur the redevelopment of private lending. A lot of banks have a lot of money riding on the successful sales of these condo units. It may well be that it is in their best interest to make mortgage loans to the purchasers and hold them on their balance sheets. It’s a lot better alternative to having an empty building with no debt service capacity.Eventually, the loans could be sold to private investors or once the project is seasoned and within Fannie’s guidelines the owners could refinance to a conventional mortgage.

So, hope that the builders don’t log roll Congress and force Fannie to back off from a sensible position. We have to take some lumps along the way to recovery and the condo market is going in line for some of them.