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Landing a mortgage on a condominium unit never has been an easy task. It just got more difficult.
In response to the June 2021 collapse of an oceanfront tower near Miami, mortgage giants Fannie Mae and Freddie Mac are rolling out new rules covering condo loans – and critics say the stricter reviews are causing condo sales to fall apart, even in buildings with no structural issues.
Fannie Mae stopped buying loans for condo units in buildings where major repairs have been put off, or where the condo association has been ordered by local authorities to fix unsafe conditions, as of Jan. 1. Freddie Mac enacted similar guidelines Feb. 28.
The new rules are complicated enough that the Community Associations Institute, a trade group for 43,000 homeowners associations and condo associations, has asked Fannie and Freddie to delay the restrictions.
“These rules, imposed so quickly, are creating bottlenecks and chaos,” says Dawn Bauman, a senior vice president at the organization. “It’s delaying sales in some condos.”
Bauman acknowledges that the rules are “well-intentioned.” Fannie and Freddie rolled out stricter guidelines after Champlain Towers South, an aging building filled with sleeping residents, crashed to the ground in the middle of the night, killing 98 people. The volunteer members of the condo board had clashed over costly repairs, ultimately postponing work that might have bolstered the building, according to news reports after the tragedy.
A response to ‘aging infrastructure’
The Florida collapse illustrated an uncomfortable truth about the nation’s condos: Some buildings have been neglected to the point that they’re hazardous. Decisions about repairs largely fall to residents serving on their condo boards. They must decide whether to impose hefty assessments on themselves and their neighbors.
What’s more, the structural integrity of condos is regulated by a hodgepodge of state and local rules. The Miami-Dade County Commission last week passed an ordinance that will require all condo associations and homeowners associations to publicly disclose financial and structural information.
The new guidelines from Fannie and Freddie also offer a response to the awkward reality that people might be living in rickety structures. “In the aftermath of the collapse of the Champlain Towers South in Surfside, Florida, the risks of residential buildings with aging infrastructure and in need of critical repairs have been brought to the forefront of discussion throughout the nation,” Freddie Mac says in its new guidelines.
Because most new mortgages are packaged and sold by these agencies, lenders typically decline to originate loans that Fannie and Freddie won’t buy.
The new rules have perplexed nearly everyone who tries to make sense of them, says Adrian Adams, a Los Angeles attorney who specializes in condo law.
“The questions are confusing,” Adams says. “Everybody’s like, ‘How do we answer these?’ There are problems with the questionnaire, and they’re significant enough that boards and management companies are declining to fill them out.”
New scrutiny for condo mortgages
In cases where buildings have shown structural defects, neither Fannie nor Freddie will green-light loans until the necessary repairs have been completed and documented. The agencies’ new policies are labeled temporary, but no expiration date has been set.
The most visible piece of the increased oversight is new paperwork required by Fannie and Freddie. Fannie Mae’s new eight-page form asks, among other questions, “When was the last building inspection by a licensed architect, licensed engineer, or any other building inspector?”
Freddie Mac, for its part, retired its four-page “Condominium Project Questionnaire – Short Form” and replaced it with a five-page “Condominium Project Questionnaire – Full Form.”
Among the technical phrases featured in the updated condo approval guidelines are “critical repairs,” “material deficiencies,” “significant deferred maintenance” and “routine repairs and maintenance.”
The Community Associations Institute’s Bauman says the new questionnaires are problematic because they ask volunteer board members to delve into areas far outside their expertise.
What’s more, a loan might be rejected not because a condo is unsafe but because a condo association fills out the new form incorrectly.
“Our members report creditworthy borrowers have been denied credit to purchase homes and refinance mortgages in condominium and cooperative projects with no safety, soundness, structural integrity or habitability concerns,” the Community Associations Institute wrote in a recent letter.
‘A reckoning’ for condo associations
There are an estimated 175,000 condo associations in the U.S., according to the Community Associations Institute, making the property type an important part of the housing market. Those associations oversee millions of condo units – some are high-value penthouses, but many units serve as retirement homes, starter homes and investment properties.
Fannie and Freddie are pushing condo associations that have neglected maintenance to invest in repairs.
“It’s a reckoning for sure,” says Orest Tomaselli, president of project review at CondoTek. “A lot of purchasers and owners are being denied access to financing because of these new rules through no fault of their own.”
As of late February, Fannie Mae had compiled a list of more than 1,000 condo associations ineligible for loans. Florida had the most properties on the list by far, with 413, followed by California with 91.
Not all the properties are banned from agency-backed mortgages because of structural defects. Many aren’t eligible for Fannie financing because they’re considered condo-hotels, or because they’re in mixed-use buildings with a large percentage of commercial uses, or because their reserves fall below minimum requirements.
As for the buildings on the list because of structural issues, at least several would be unlikely to attract buyers. The Regent Palace in Surfside is 70 years old and was evacuated in 2021, according to Fannie’s list and news reports. A condo in Titusville, Florida, appears on Fannie’s spreadsheet because it has been condemned. A project in Key West that’s on the list has been the subject of extensive news coverage.
What other mortgage options are available to condo buyers?
If Fannie and Freddie won’t sign off on your condo loan, there is another option: Some lenders offer a type of mortgage known as a non-warrantable loan.
Jeff Lazerson, president of MortgageGrader in Laguna Niguel, California, says the new rules from Fannie and Freddie have sparked “a fast-developing crisis.” He has been directing condo buyers to portfolio lenders that offer non-warrantable loans on condos that Fannie Mae and Freddie Mac decline to finance.
These mortgages aren’t resold to Fannie and Freddie. Instead, they’re held in the portfolio of a lender, or sold to private investors.
Non-warrantable loans carry less stringent underwriting requirements around such issues as non-owner occupancy, condo association reserve levels and presence of short-term rentals. A mortgage broker may be able to find a lender who is willing to hold your condo loan in its portfolio.
“It is an alternative,” says Adams, the Los Angeles attorney. “But I don’t know how deep it is, how much money is available.”
Learn more:
- 10 first-time homebuyer loans and programs
- How to choose between a condo, house, townhouse or apartment
- Second home vs. investment property: Different mortgage rates and requirements
