New Condo Mortgage Rules Increase Scrutiny and Costs

New mortgage rules implemented by Fannie Mae and Freddie Mac, effective Monday, are set to increase scrutiny on condominium associations and could lead to delays, denials, and higher costs for prospective condo buyers. These policies, announced in March, aim to identify condominium buildings with potential financial or structural risks, adding complexity to the sales process. The enhanced underwriting requirements are a direct response to the 2021 partial collapse of a 12-story condo building in Surfside, Florida, which resulted in 98 fatalities. Following that disaster, Fannie Mae and Freddie Mac stated they would no longer purchase or guarantee loans for projects with significant deferred maintenance, critical repairs, or certain special assessments. These government-sponsored enterprises collectively purchase approximately 70% of home loans originated by lenders, according to the National Association of Realtors, underscoring the significant impact of their new guidelines.

A key change taking effect on Monday is the elimination of the streamlined "limited review" process for condo projects. Unless a project qualifies for a waiver, lenders are now mandated to conduct a more comprehensive review of the condo association's financial health, including its reserves, insurance coverage, and the physical condition of the building, before a mortgage can be sold to Fannie Mae or Freddie Mac. Furthermore, beginning in January, condominium associations seeking financing from these entities will be required to maintain at least 15% of their annual budget in reserve funds for major repairs and replacements, an increase from the current 10% threshold. This change aims to ensure that associations are better prepared for future maintenance needs and unexpected expenses, thereby reducing the risk for lenders and investors.

Despite the increased stringency in some areas, the new rules also introduce some easing of restrictions for smaller condominium projects. A prior rule that imposed a 50% cap on investor-owned or non-owner-occupied units has been eliminated. This adjustment could potentially benefit markets with a higher proportion of rental units or investment properties. Additionally, the updated policies have relaxed certain requirements related to master property insurance, although the specifics of these eased rules are still being clarified. The overarching goal of these regulatory adjustments is to bolster the stability and safety of the condominium market, mitigating risks associated with deferred maintenance and financial instability within condo associations, while also acknowledging the need for some flexibility for smaller developments.