Even before last year’s deadly collapse of a Surfside, Florida, condominium tower that grabbed international headlines, getting a conventional mortgage for a condo was difficult. Now, it’s getting even harder.
At the start of this year, Fannie Mae stopped buying loans for condo units in buildings where major repairs have been deferred or where the condo association has been ordered by local authorities to remedy unsafe conditions. Freddie Mac imposed similar temporary guidelines that took effect Feb. 28, 2022.
The new rules from the government-sponsored enterprises (GSEs) follow the collapse of Champlain Towers South, an oceanfront condominium building near Miami. The failure of the tower resulted in tragedy. Nearly 100 people died in June 2021 when a portion of the aging structure filled with sleeping residents fell in the middle of the night.
This nightmarish episode spurred Fannie and Freddie to create new rules for condo associations. These rules were created, the GSEs said, after lenders and other industry stakeholders provided feedback about the potential risks. If they wish to continue doing business in this sector, mortgage lenders and originators must be aware of the temporary project-review requirements from the agencies, and they should seek alternatives for borrowers who can’t qualify for an agency loan.
Condos are an important part of the U.S. housing market. There are an estimated 355,000 condo associations that house some 74 million people across the country, according to the Foundation for Community Association Research. These groups oversee millions of condo units that serve as retirement homes, starter homes and investment properties.
The phrase “critical repairs” is just one bit of terminology featured in the GSEs’ updated condo-approval guidelines. Others include “material deficiencies,” “significant deferred maintenance,” and “routine repairs and maintenance.” Among other questions, Fannie’s new eight-page condo-project questionnaire asks for the date of the last building inspection performed by a licensed architect, licensed engineer or another professional.
In cases where buildings have documented structural defects, neither Fannie Mae nor Freddie Mac will greenlight a loan until the necessary repairs have been completed and recorded. The agencies’ new policies are labeled as temporary, but no expiration date has been determined.
News reports after the collapse of Champlain Towers South revealed disagreement among property owners and board members about how much to spend on repairs for the 40-year-old tower. The tragedy focused new attention on the reality that other condos could be in danger as volunteer boards choose to delay maintenance rather than impose costly assessments on themselves and their neighbors. Beyond the typical aging of a condo building, many of these structures are waterfront towers, placing them in a geographic location that can create additional wear and tear.
Mortgage lenders want to do their part to prevent a repeat of the tragic loss of life seen in Surfside. The GSEs’ new rules reflect this desire. While they are well-intentioned, they are sometimes creating confusion and delays.
Some of the new queries are quite detailed and others are troublingly vague. Condo boards tend to be run by volunteers without backgrounds in structural engineering, so finding someone to complete the questionnaire can be a challenge. If the questionnaire isn’t filled out properly, the loan may become ineligible to be delivered to Fannie or Freddie.
Even before the recently revised guidelines, the GSEs have long refused to lend on certain condos for a variety of reasons. Fannie and Freddie reject loans for condo projects with nonowner occupancy rates of more than 50% and in buildings where more than 35% of the space is devoted to commercial use. Associations with low cash reserves, as well as properties that operate as short-term rentals and condotels, also are nonstarters for conventional lenders. Some of these rules date back to the Great Recession as condos proved to be a particularly risky property type in the real estate bubble that led to the financial crash of 2008.
Additionally, the GSEs may take 60 to 90 days to sign off on the new paperwork, making it more difficult to meet a closing date in these scenarios. As a result of the new rules, private lenders have been hearing from mortgage brokers who say the arduous new process is delaying or killing deals. Private lenders don’t want to lend on buildings that are on the verge of collapse. But there is a more streamlined and efficient way to perform the necessary due diligence. Some private lenders use a condo questionnaire that is two pages long and unchanged since the Surfside incident.
The onerous rules also may partially explain why so many condo sales close with no financing. In Florida, for instance, there were 160,177 sales of condos and townhouses in 2021, according to state Realtors. More than half of these deals were all-cash transactions. By contrast, only 30% of the state’s single-family home sales last year were cash deals.
Private loan options
The stricter rules imposed by Fannie and Freddie have created opportunities for nonagency lenders. These companies use more flexible, common-sense guidelines than those implemented by the GSEs. As a result, private lenders are able to do business with a number of highly creditworthy borrowers.
Many borrowers looking to purchase a condo have high credit scores and/or sizable assets. They could pay cash for their condo but prefer to use someone else’s money. This is why private lenders offer a type of product known as a non-warrantable condo loan. These mortgages are available to borrowers who find themselves locked out of GSE financing due to the new certification requirements.
Nonwarrantable condo loans come with less stringent underwriting requirements involving such issues as nonowner occupancy rates, condo association reserve levels or the presence of short-term rentals. Borrowers can expect to pay roughly 0.5% to 1% more than the rate for conventional financing.
Naturally, nonwarrantable condo loans don’t allow private lenders to say yes to every deal, but these specialty lending companies are far more likely to approve a condo loan than a conventional lender. For example, they may dig more deeply into the details of pending litigation against a condo board or be willing to lend in buildings where up to 90% of the units are investor owned.
Nonagency lenders also are much more willing to do loans for condotels, for buildings under renovation, and for condos in buildings where more than 35% of the space is devoted to commercial use. All of these issues are deal-breakers for conforming lenders.
That’s not to say that private lenders will lend in absolutely every situation. If the condo board is facing litigation about a major structural issue, for instance, a private lender may not do the loan. Broadly speaking, however, private lenders have the flexibility to say yes to condo loan applications that the agencies reject. ●