New Condo Lending Rules Add Scrutiny to Building Finances

Prospective homebuyers considering a condominium may soon realize that mortgage lenders are equally concerned about the condo building as they are about the buyer, according to a recent CNBC report. New lending policies for condominiums, effective August 3 from Fannie Mae and Freddie Mac—government-sponsored enterprises that acquire qualifying mortgages in the secondary market—indicate that certain purchases may undergo increased scrutiny by lenders.

Although lenders typically assess condo associations in many instances, the new regulations necessitate a more thorough examination of the association’s financial health, reserve funding, and building maintenance for specific transactions.

These modifications aim to more effectively identify condominium buildings that may have financial or structural issues, thereby minimizing the risk of unexpected special assessments or increased association dues for owners, as stated in a letter to lenders from Fannie Mae dated March 18.

Nevertheless, certain trade associations and lending professionals indicate that this modification may result in delays in the approval of mortgages, and in certain instances, could lead to the rejection of mortgage applications if a condominium building does not comply with the new criteria.

“It will make the [application] process take much longer and will result in a lot of disqualifying applications,” said Max Slyusarchuk, CEO of AD Mortgage in Fort Lauderdale, Florida. “[Buyers] should expect it to be way more difficult to buy a condominium.”

The mortgage wholesaler sent a letter dated July 16 to the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, urging the agency to modify or postpone the changes. The FHFA did not provide a response to an email requesting comment.

How Will Stricter Policies Affect the Market?

Fannie Mae and Freddie Mac acquire home loans from lenders and consolidate them into mortgage-backed securities for investors. When lenders wish to sell mortgages to Fannie or Freddie—which is a common practice as it allows them to free up capital for additional lending—the loans must adhere to specific underwriting criteria, applicable to both condominiums and other types of residences.

Generally, purchasing a condominium is less costly than acquiring a single-family home. The median price for a condo or co-op reached $380,000 in June, reflecting a 1.6% increase from the previous year, as reported by the National Association of Realtors. In contrast, the median price for a single-family home stood at $446,400. As of 2023, the total number of condominium units in the U.S. was approximately 8.6 million, according to the American Housing Survey (AHS) conducted by the Census Bureau.

Following the partial collapse of the 12-story Champlain Towers South condominium in Surfside, FL, on June 24, 2021, which resulted in the tragic loss of 98 lives, lawmakers and policymakers have been actively working to enhance regulations related to condominium purchases and financing.

On June 22, the National Institute of Standards and Technology, a government agency under the Commerce Department responsible for investigating significant building failures, published a report indicating that the 40-year-old structure had inherent design and construction deficiencies from its inception, compounded by decades of deterioration that led to the collapse. Subsequent reports revealed that the condominium association had postponed essential repair work while debating the project’s cost and scope.

In response to this disaster, the Florida state legislature implemented reforms for condominiums, which include mandatory inspections for older buildings, as well as requirements to rectify identified structural issues and to sufficiently fund reserves for future repairs.

Following the Surfside collapse, Fannie Mae and Freddie Mac implemented stricter condo underwriting standards nationwide. They rendered projects with considerable deferred maintenance, essential repairs, or specific special assessments ineligible for the mortgages they would buy or guarantee. Although these changes were initially intended as temporary measures, they were largely solidified as permanent in 2023.

In March of this year, Fannie and Freddie announced further modifications. Some of these changes, such as granting condo associations greater flexibility in insuring roofs, aim to lower costs and enhance access to insurance coverage for these associations.

Other changes focus on mitigating risk for homebuyers and lenders. Starting on August 3, one such modification will eliminate the limited or streamlined review process that has been available for specific condominium buildings. Consequently, unless a project qualifies for a waiver—which may include certain smaller condominium projects—most transactions will necessitate a full review. This implies that lenders will conduct a more thorough evaluation of the condo association’s finances, reserves, insurance coverage, and the overall condition of the building before the mortgage can be approved for sale to Fannie or Freddie.

Policies Potentially Complicating the Mortgage Process

Approximately 40% of condominium acquisitions that involve a mortgage have utilized a limited review process, which may now necessitate a full review. This alteration is expected to extend the duration of the loan approval process, according to Dawn Bauman, CEO of the Community Associations Institute, an organization that advocates for condominium, homeowners association, and housing cooperative communities.

“That is something that will require additional manual human engagement from almost all parties involved, certainly for the mortgage lender and community association,” Bauman said.

A representative from the Mortgage Bankers Association stated that the delay in the mortgage application process will be contingent upon the specific project, the accessibility of necessary documentation, and the ease with which this documentation can be supplied.

After a lender conducts a comprehensive review, “the project is recorded in the [Fannie and Freddie] systems as approved,” according to the MBA representative. “This is not a requirement for every loan.”

In essence, once a condominium project has undergone a thorough review, lenders typically do not need to repeat this process for each subsequent mortgage.

Simultaneously, if a condominium development does not satisfy the underwriting criteria set by Fannie Mae or Freddie Mac during a comprehensive evaluation, the lender may refuse to grant the buyer a mortgage, according to Bauman.

“I think we’ll see some buildings that qualified under limited review become ineligible under full review because there may be a nuance they aren’t complying with,” Bauman said. “But it won’t mean the building is unsafe or structurally compromised or that the financial health of the building is in trouble.”

For purchasers, a rejection from a single lender does not automatically imply that the unit is unpurchaseable. Certain lenders might opt to retain the loan within their own portfolios instead of selling it to Fannie Mae or Freddie Mac. This could result in higher costs, as noted by Slyusarchuk. In general, if a lender is prepared to issue a loan that they cannot sell, they will likely reduce their own risk by, for instance, demanding a larger down payment or imposing a higher interest rate on the loan.

Moreover, a delay in the process could provide cash buyers with an advantage, as they would be capable of completing a transaction significantly faster, according to Bauman.

To read more, click here.