Residential Magazine

Shedding light on a spate of condo loan rejections

By Jim Davis

Fannie Mae and Freddie Mac intensified their scrutiny of condominiums after the 2021 collapse of the Champlain Towers South complex in Surfside, Florida, which killed 98 people in one of the worst tragedies of its kind. Shortly after the disaster, the GSEs revised their policies on loans purchased in condo developments, with an aim to protect borrowers.

“Projects in need of critical repairs or that have significant deferred maintenance can result in unsafe living conditions, evacuations and uninhabitable homes,” a Fannie Mae spokesperson writes in an email. “In addition, special assessments for these types of issues can result in a substantial financial hardship for homeowners — especially low-income or first-time homebuyers — which can put them at risk for loan default and foreclosure.”

One of the practical effects of these changes is that more condo loans are being rejected or delayed, says Dawn Bauman, chief strategy officer for the Community Associations Institute, which advocates for condo associations as well as the 74 million people living in these developments. Her organization sent a survey to members last year. Of the 541 respondents, about one-quarter said that loans in their condominium developments were denied due to the new requirements while more than one-third experienced significant delays.

Bauman says that she’s concerned that the new rules apply to all condo projects with five or more attached units. Bauman also says that her membership learned that Fannie Mae maintains a list of condo projects for which they won’t purchase loans.

“The ineligible blacklist came to the surface after all of this,” Bauman says. “It was like, ‘Wait a second. There’s a list, actually?’ While it existed before, it wasn’t as big of a deal before because there weren’t that many projects on that list. It then became just a bigger deal after the new requirements came out.”

The Boston Globe reported last year that the number of U.S. condo projects on this list had grown to more than 2,300. Data and technology company CondoTek told the newspaper that the list numbered fewer than 300 projects the year before.

Fannie Mae reports that only 1.2% of condo projects were labeled as “unavailable” as of this past June. The agency also says that condo loan acquisitions totaled 9% of its single-family conventional business in both 2021 and 2022, an increase from 8% in 2020.

“Most projects that are currently listed as unavailable have other eligibility issues, such as active or pending significant litigation, hotel- or resort-type characteristics with transient occupancy, too much commercial space, or inadequate insurance,” according to Fannie Mae.

The Community Associations Institute, the Community Home Lenders of America (CHLA) and the National Association of Realtors asked the GSEs and its regulator, the Federal Housing Finance Agency, for more transparency about the list of nonwarrantable projects. This past December, the GSEs annnounced plans to create an online tool for homeowners associations to identify whether they are on the list and what they need to do to be removed.

CHLA executive director Scott Olson applauds the move for increased transparency, saying that if the GSEs identify problems with a condo development, the association should be made aware so it can fix them. Olson says that his organization has been focused on prevention of overreactive policies. He hopes that the GSEs and other regulators scrutinize the underlying causes of the Champlain Towers South disaster. 

“You should worry about older buildings; you should worry about high rises,” Olson says. “You should worry about areas where there’s a lot of water. That was a big problem with Surfside — the water erosion. You shouldn’t just overreact and be really tough on everything.”

Bauman notes that condominiums tend to be an affordable option for first-time homebuyers, retirees and everyone in between. She remains concerned about what could cause the GSEs to reject loans from condo developments. Those could be everything from insurance requirements to special assessments. She notes that homeowners associations commonly levy assessments for such things as lobby construction or common-area improvements. What types of assessments could cause more delays or denials for condo loans?

“Transparency is awesome, of course,” Bauman says. “The next step will be to really evaluate whether these are reasonable requirements, or addressing liability concerns for Fannie Mae and Freddie Mac, while making sure they’re doing what they’re supposed to be doing for the American people, which is putting liquidity into the marketplace.” ●


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