Fannie Mae and Freddie Mac help finance nearly half of all home purchases, so when they change their rules, it can have a significant impact on the market. Recent changes to their policies for financing condominium mortgages will help some consumers but pose challenges to others.
Impact of Surfside Collapse
It helps to look back a few years at how Fannie Mae and Freddie Mac—also referred to as the government sponsored enterprises or GSEs—responded to the 2021 collapse of a building in Surfside, Fla., which killed 98 people.
Investigations revealed that the building needed major repairs but lacked the reserves to pay for them. At that time, the GSEs implemented new rules mandating engineering and structural studies as well as financial studies and disclosures. Lenders must verify that these studies and disclosures are in place, and collect information on needed or planned repairs, among other things.
Those rule changes enabled borrowers with down payments of 25% or more or other positive factors to use a limited review process with fewer hurdles and less documentation required. Otherwise, lenders were responsible for a full review that included collecting all documents and verifying the GSEs’ requirements. The 2021 rules were aimed at improving safety but also making HOAs more financially stable.
The New Rules
The changes made this spring implement lessons learned from several years with the post-Surfside rules. Rules that made sense in 2021 but didn’t improve safety are being relaxed, while other rules are being tightened. Specifically, the limited review, which allowed lenders to skip some documentation and checks, was eliminated. However, the GSEs will allow HOAs with 10 or fewer units a waiver from a full review, reducing the burden on small projects.
In addition, the GSEs eliminated the stipulation that no more than 50% of units in a project could be investor-owned, which should help improve demand and value. However, this change could create additional competition for owner occupants.
Although limited reviews are gone, Fannie Mae provides an option that may help HOAs manage this change. Fannie Mae’s Condominium Project Manager is a database of all condominium projects that meet Fannie Mae’s standards. This service, new in 2023, eliminates the need for lenders to submit full reviews once Fannie Mae has approved a project. Thus, once one lender submits documentation and the project is approved, all approved lenders can see the project’s status and no review is needed for subsequent transactions, eliminating costly and redundant fees for documents and questionnaires. HOAs can look up their status on Fannie Mae’s website and work with an approved lender to submit documentation for approval. Unfortunately, REALTORS® do not have access to this database unless they are an HOA’s official representative, nor can they submit documentation for approval. NAR believes this should change as REALTORS® are engaged far earlier in the process.
Higher HOA Reserve Requirement Raises Concern
However, some changes raise concerns. The GSEs raised the reserve requirement for HOAs from 10% to 15%. Alternatively, the GSEs will allow HOAs to use a reserve study to determine the appropriate amount of funds, but the HOA must use the highest estimate from the study. The 50% increase in reserves is problematic, and the timing of the GSEs’ mandate exacerbates the issue, creating a short timeframe for HOAs to transition to higher reserves. This problem will have a particularly acute effect on low- and moderate-income condo owners; those on fixed incomes like retirees; and regions facing other financial stresses like rising insurance rates and taxes.
National Association of REALTORS® leaders have expressed concern about the larger reserves and short time for the transition. It could pose significant affordability challenges to both existing homeowners and prospective home buyers, stifling an important part of the trade-up and trade-down market. NAR has shared these concerns with the GSEs and will continue to work with them to ameliorate the impact, while sharing information about the changes with REALTORS®.
Read more on the new condominium underwriting guidelines.
Coming soon: On Aug. 11, Fannie Mae Director of Collateral Risk Management Jodi Horne and Rob Harrington, chair of NAR’s Conventional Financing and Policy Committee, discussed the new condominium rules and answered members’ questions. A link to the recorded webinar will be available soon.
If you have questions, concerns or experiences you’d like to share with REALTOR® News readers, email news@nar.realtor.
