Wednesday, Fannie Mae again Freddie Mac have adopted extensive changes to their approval requirements for mortgage-eligible condominium projects. The changes created more flexibility and accessibility regarding replacement costs and deductible requirements for condo insurance– but they took a step back by eliminating the mandate for so-called limited reviews.
Why is this issue important? There are approximately 5.4 million owner-occupied condominium units in the United States, which is approximately 6.3% of all owner-occupied homes. Condos are often more affordable than site-built homes – and for many low-income homebuyers, they’re the only option they have for homeownership.
This issue is also important because while insurance costs have increased over the past five years, nowhere has the impact been more apparent—or more significant—than in the condominium market. Rising premiums are no longer just a matter of homeowners association budgets; they have become a financial barrier. Increasingly, otherwise condo projects are deemed ineligible for mainstream financing, diminishing options for credit-worthy buyers.
Since nearly 20% of US condoms are found in Florida, the state dominates this conversation—and for good reason. The state has faced a series of natural disasters, leading to insurance losses and rising premiums. But this is not just a Florida problem. Insurance pressures are reshaping condominium affordability and mortgage access across the country.
So, what did Fannie and Freddie do? Two important and positive changes in insurance requirements include loosening the requirements to cover the cost of accepting the amount of money in the ceiling and changing the allowable deductible levels.
These changes will improve the availability and affordability of condo loans. They strike a better balance between monitoring risks associated with natural disasters and insurance losses and mitigating the impact of recent increases in insurance costs. The result will be lower insurance costs for condo projects and more owners and potential home buyers who qualify for loans.
At the same time, lenders will have concerns about the elimination of the option to do a “limited review” of the condo association, which now requires a full review of all condominium projects. The full review includes additional documents from the HOA, including a full budget review for all condominium projects, and increased costs.
The elimination of limited review authority will have a negative impact and will have a disproportionate impact on small lenders that are not GSE dealers, who must rely on loan consolidators. Therefore, GSEs should explore ways to achieve their goals in a less burdensome manner.
Lenders note, however, that Fannie and Freddie have increased the exemption limit – from 4 to 10 unit projects. We welcome news of small condominium projects.
Fannie and Freddie also significantly increased their minimum deposit requirements, from 10% to 15% of their annual net income. While strengthening reserves can improve long-term financial stability for organizations and help offset future special repair assessments, it will result in higher HOA monthly payments, which will negatively impact the affordability of some borrowers. While this may be prudent for high-risk condos, it is not necessary for complex projects.
Further refinement is still needed. One key area is the definition of “critical repair.” Another recommendation of the Condominium Working Group of the Condominium Community Lenders of America (CHLA) is the need for clear, consistent standards. In some cases, minor issues are classified as critical, causing unnecessary costs, delays, and uncertainty in the lending process.
Still, the process leading up to this week’s announcement was inclusive and productive — giving lenders and condo associations an opportunity to provide feedback and recommendations. This makes for better policies.
And Fannie and Freddie made condo financing a priority. In fact, far more condo projects are approved by the GSEs than by the FHA – which led CHLA earlier this year to ask the FHA to adopt a policy to include mortgage insurance on condo projects approved by Fannie or Freddie (but not currently by the FHA).
At a time when the average age of the first-time home buyer has reached 40 years of age, condominiums are more important than ever as an important entry point to home ownership.
Ensuring that insurance and underwriting standards are both reasonable and reasonably priced will be critical to maintaining that approach. In an already tight housing market, maintaining access to mortgage financing is not only important—it’s critical.
Kelly Welch is a member of the CHLA Condominium Working Group and a Senior Strategy and Compliance Advisor with Equity Resources.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: [email protected].
