Published in The Boston Herald
It’s a tough time to be on the hunt for a home. Prices have reached record levels. Mortgage rates are rising.
Less visibly, new rules from Fannie Mae and Freddie Mac are also making it more difficult for people to buy condominiums, which are often how first-time buyers enter the real estate market.
The federally chartered mortgage companies are trying to verify the physical and financial soundness of condo buildings before backing loans on the units. But condo owners and the associations they hire to manage their buildings are finding it difficult to comply with the rules. Many are opting not to participate in lending backed by Fannie or Freddie.
That’s making mortgages for condos harder to come by — and putting homeownership out of reach for millions of people.
Demand for condos continues to rise. The supply of condos for sale is declining faster than that for single-family homes.
Like all commercial and residential buildings, condos need to be safe and structurally sound. That’s why the law currently requires thorough building codes, inspection standards, maintenance schedules, construction licensure, federal housing regulations and more.
Fannie and Freddie have a stake in the structural and financial soundness of condo buildings, of course. The companies, and their investors, ultimately receive the monthly mortgage payments each condo owner makes. A decrepit building, or one that doesn’t have enough money to maintain itself, is a risk to the occupants, to that stream of future payments, and to taxpayers everywhere.
But the new rules from Fannie and Freddie are creating problems for the condo market. If they determine that a condo building is a potential physical or financial risk, then they won’t guarantee mortgages on the units in that building.
Condo buildings must undertake and document repairs to the satisfaction of Fannie and Freddie in order to get off this “risk” list. To prove they are up to date, condo associations are being asked by lenders to complete vague, extensive questionnaires detailing building maintenance and inspection records as well as information on financial reserves. Answering those questions typically requires the assistance of legal counsel — and that can be very expensive.
Some condo associations are refusing to sign off on documents attesting to the safety and financial soundness of their buildings because they’re unable to provide the information Fannie and Freddie are asking for.
The upshot is that many owners can’t sell, and buyers can’t secure financing. Lenders won’t originate loans if they can’t sell them to Fannie and Freddie.
Lower- and middle-income Americans will pay the heaviest price for these rules. Condo purchases are often how they begin the process of saving and building generational wealth. Instead, they may watch as wealthier, all-cash buyers and investors snap up properties they might otherwise be able to purchase.
Sellers, for their part, have fewer potential buyers. That’s causing their properties to sit on the market longer — and may yield lower sales prices. Some may not be able to find buyers at all.
Squeezing the housing balloon like this also puts upward pressure on the price of single-family homes as potential buyers turn away from condos, unable to secure financing.
Finally, condo owners may find that this lender reluctance limits their ability to access the equity in their homes. Such loans can be critical when a special assessment for, say, a new roof comes along.
In this way, the new rules from Fannie and Freddie could actually undermine condo buildings’ efforts to stay up to date on maintenance.
Since announcing the new rules, Fannie Mae has acknowledged their unintended negative consequences. That’s a start. Next, the mortgage giants must revise those rules to maintain the safety owners need without locking millions of people out of the housing market.
Kaki Lybbert is 2022 Vice President of Advocacy, National Association of REALTORS®, and a REALTOR® in North Texas.