4 changes Fannie Mae and Freddie Mac have made on condo policy

4 changes Fannie and Freddie have made on condo building policy

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Three years after a condominium building collapsed in Surfside, Florida, killing 98 people, policies have changed regarding the safety of condo buildings — as well as mortgage lending for residents within these buildings. Fannie Mae and Freddie Mac have both updated policies, especially as condo living is on the rise due to a recent lack of housing inventory.

The number of condominium and homeowner associations is set to increase from 365,000 in 2023 to as much as 370,000 in 2024, accounting for almost one-third of U.S. home inventory, according to a recent Foundation for Community Association Research study and forecast.

"Approximately 67% of the homes completed in 2023 were in a homeowner's association, condominium or housing co-op. That's a big number," Dawn Bauman, executive director of the foundation and chief strategy officer at the Community Associations Institute, recently told National Mortgage News.

Community associations new and old now account for around 30% of overall housing stock. While the association component of new home construction is considerable, the sector does also include a significant number of older buildings more than 40 years old, Bauman said. Because of this, Freddie Mac and Fannie Mae established more rigorous guidelines for ensuring the safety and soundness of these residential buildings.

Lenders and associations haven't argued with the need for some rule changes following the Surfside condo collapse, but have looked for improvement in communication regarding which buildings have issues that bar financing and processes available to remedy such concerns.

Both Freddie Mac and Fannie Mae have responded with plans to improve transparency for both associations and lenders.

In addition, Freddie is extending the use of attorney opinion of title letters to loans collateralized by condominiums and those with deed restrictions, such as properties that are part of a homeowners association.

While broader use of options like attorney opinion letters has gotten pushback from the title insurance industry, saying they're insufficient given the risk, efforts to explore this are moving forward due to the potential to save borrowers hundreds of dollars upfront per loan.

However, American Land Title Association CEO Diane Tomb said the letters are likely to rarely, if ever, result in savings and "will expose additional consumers and lenders to unneeded risk and weaken protection of their property rights."

One-third of title claims are for issues not found in routine searches conducted for an AOL, the cost of insurance has fallen almost 8% since 2004 "seller-pay" regimes in many states minimize buyer costs for insurance. Condos are considered particularly vulnerable to risks, according to ALTA.

Read more about the recent policy changes both Fannie Mae and Freddie Mac have made on condo buildings.

Fannie Mae, Freddie Mac add transparency as condos and HOAs grow

For lenders and investors, financing an association property has some complications compared to a traditional single-family home because underwriting has to account for additional factors like the finances of the building and potential super liens on units with unpaid fees. Since the notorious collapse of a Surfside, Fla., condo building, the market's been perhaps rightfully more worried about the soundness of this housing stock as it ages.

As a result, influential government-related mortgage investors have instituted stricter rules, first on a temporary basis, and later in a more permanent form some lenders have found to be relatively more practical. Not only is Freddie streamlining processes and opening up an appeals process for associations, Fannie has plans to "introduce a new online lookup tool for homeowners' associations and their management companies to view project ineligibility information."

Fannie's plans, noted briefly in a recent posting of the government-sponsored enterprise's website, are set to come to fruition in the third quarter of this year.

Read more:

Condos, HOAs set to grow as Fannie, Freddie add transparency

Freddie Mac streamlines condo originations submitted to Condo Project Advisor

Changes to Freddie Mac's automated inquiries about the status of collateral properties submitted to its Condo Project Advisor for single-family loans include lenders being prompted with an automated message that suggests when a building should be submitted for possible "project certified" status, which could make lenders eligible for streamlined underwriting after a short turnaround period if they request a review.

Procedural limits on condo originations at Freddie and competitor Fannie Mae aimed at preventing issues like the Surfside building collapse have frustrated lenders.

"We are committed to continuing to find ways to help streamline condo loan originations, while helping lenders ensure that condo homebuyers are put on a path of sustainable and successful homeownership in condo communities," Tanya DeLia, single-family vice president of collateral risk management at Freddie Mac, recently told National Mortgage News' Bonnie Sinnock in an email.

Read more:

Freddie Mac makes changes to streamline condo originations

Fannie Mae, Freddie Mac update condo policies after previous temporary reforms

Last July, Fannie Mae released criteria for loans on apartments within condominiums and cooperatives that will replace stop-gap measures for buildings with significant deferred maintenance or public repair directives for unsafe conditions. Fannie's competitor, Freddie Mac, also released updates to its review criteria that went into effect on Sept. 18 and said it would add a new status to the project assessment requests on the platform it uses to disseminate information about buildings, Condo Project Advisor.

Both GSEs won't be buying loans on buildings that are currently under evacuation orders relating to unsafe conditions. They also will be barring the purchase of any loan on a unit in need of repairs that are critical or that exceed $10,000. Fannie and Freddie will be requiring a review of any structural or mechanical inspection report done within the last three years and information about special assessments.

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Fannie Mae, Freddie Mac update condo and co-op unit policies

Fannie Mae and Freddie Mac add appraisal rules

In new guidance announced on May 1, both Fannie Mae and Freddie Mac added rules lenders will need to follow when consumers want them to take a second look at their valuations. Freddie also expanded its allowable lender title-insurance alternatives.

Such changes at these entities — which accounted for over half the mortgage-related securities issued domestically during the first quarter — are in line with related Biden administration efforts to reform the appraisal process and lower housing costs for borrowers.

In addition, Freddie is extending the use of attorney opinion of title letters to loans collateralized by condominiums and those with deed restrictions.

Read more:

Fannie Mae, Freddie Mac add appraisal rules, title options