New rules issued by Fannie Mae are making it harder for people to get mortgages for condominium units, particularly when the condo is new construction or a new condo conversion. The rules are designed to reduce the risk of foreclosures. However, they come at a bad time, because the real estate market is slow and many people have already been having more trouble getting mortgage loans.

Fannie Mae can’t tell lenders what to do, but Fannie repurchases a huge percentage of mortgages, and many lenders are unwilling to offer loans unless they can turn around and resell those loans to Fannie. So when Fannie tightens its eligibility for repurchases, it makes lenders less willing to offer loans.

Here’s a summary of the new rules. In general, Fannie will no longer repurchase a mortgage from a lender unless:

► 70% of a new condo project has already been sold or is under contract. This is an increase from the prior requirement of 51%. This is a tough requirement in a down market. A lot of developers have been dealing with the economic situation by renting units while they wait for them to sell. However, if a developer rents more than 30% of the units, the entire project may be ineligible for Fannie approval as long as those leases are in effect.

Some developers and buyers will be caught in a “Catch-22,” because even if a developer has 51% of the units under contract, some of those contracts might expire before the developer hits the 70% threshold, because they can’t be closed without Fannie approval. So trying to reach 70% will feel like running up a down escalator.

►At least 80% of the project is residential space. This is bad news for mixed-use developments, which combine residential units with hotels, restaurants, shops or office space.

The irony is that this type of “smart growth” development is exactly what many communities have been encouraging developers to create. They want people to live, work and play in the same area, in order to reduce traffic congestion and pollution.

►No one person or entity owns more than 10% of the units. This is a problem for some condos that are newly built or converted. When a condo project first becomes available in a down market, savvy real estate professionals will often buy up a chunk of the units, with the idea of selling them later when the market recovers. Under this rule, even if a developer can persuade an investor to buy more than 10% of the units, it might be reluctant to do so because it will preclude Fannie eligibility. And in a building where an investor has already purchased more than 10% of the units, other owners might find it difficult to sell their units until the investor has begun unloading his or hers.

►No more than 15% of the units are more than 30 days late on their condo dues. The previous rule was 15% of total fee payments, not 15% of units, and it didn’t apply to new projects.

Other new Fannie requirements include:

• Condos with 20 or more units must have fidelity insurance. This is true even for established projects.
• Borrowers must buy an individual condominium owner’s insurance policy (known as an HO-6 policy), unless the condo’s master policy covers the interior of the units. Coverage must be for at least 20% of assessed value.
• At least 10% of budgeted condo income must be earmarked for the reserve fund.
• New projects must have a reserve fund adequate to cover the insurance deductible.

Finally, Fannie says that developers and sellers cannot get around any of its requirements through strategic negotiating. For instance, if a buyer doesn’t meet the requirements, sellers cannot “fudge” this by means of “builder/developer contributions, sales concessions, [condo fee] or principal and interest payment abatements, and/or contributions not disclosed on the HUD-1 Settlement Statement.”

In general, these new rules will be a significant stumbling block for condo buyers, sellers and developers. The only people who appear to benefit would be sellers of single-family homes. The reason: Many buyers who could otherwise easily qualify for a mortgage on either a home or a condo will be unable to qualify for a condo loan simply because of the way the condo is set up. This could make a single-family home purchase more appealing.