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Fannie Mae and Freddie Mac are imposing stricter financial and structural reviews on condominium buildings and requiring condo associations to reserve at least 15% of assessment income, aiming to reduce risk after the Surfside building collapse. The changes may further weaken an already struggling condo market by adding financing obstacles for buyers and raising maintenance costs.
Fannie Mae and Freddie Mac, the mortgage giants that support about 70% of the mortgage market, are tightening their standards for acceptable condo financing.
"Limited reviews" that allowed many highly qualified buyers to receive mortgages after a cursory look at the financial and structural health of a condo building were eliminated last month, in favor of closer reviews for all but the smallest buildings. And starting in January, Fannie and Freddie will require condo associations to allocate at least 15% of their assessment income toward their reserves, up from 10% today.
The financing changes are part of an ongoing effort to improve condo safety after the deadly collapse of an aging building in Surfside, Fla. , in 2021.
But they're also a new roadblock in a market that's already seen slumping prices, growing supply, and increased buyer skepticism toward "A well-run, established HOA with solid reserves, acceptable finances, no major items like maintenance or litigation…should still be fine," said Michael Belfor, a mortgage banker and branch manager at American Pacific Mortgage in California.
"But it absolutely does create more places for it to fail. " Condos have historically lagged the single-family home market, with prices quicker to drop and slower to rise due to their smaller buyer base. The divide has only deepened in recent years as housing affordability has deteriorated and buyers have begun to balk at association fees that can add hundreds or thousands of dollars a month to a mortgage payment.
To make matters worse, many condo associations have had to aggressively hike monthly fees or levy hefty special assessments to get in compliance with state regulations governing deferred maintenance and reserve funding. The result? Nationally, condo prices have fallen 2% from peak prices a few years earlier, according to Zillow data. And in some parts of the country, especially Florida, the drop has been far steeper.
Prices in Punta Gorda, Fla. , have dropped 35% from their September 2022 peak, while Tampa has seen a 24% decline. Elsewhere, the median condo in Austin, Texas, is down 28%, while prices in Denver and Raleigh have fallen more than 16%. Buyer demand remains weak.
Condo sales were down 2.7% in August compared to a year earlier, according to National Association of Realtors data. Single-family home sales saw a smaller 1.1% drop. Nationwide, months of condo supply — a real estate industry measure of how long it would take to sell off all inventory at the current sales pace — sits at a buyer-friendly 6.6 months, while single-family homes are at a more balanced 4.7 months.
Fannie and Freddie have an extensive list of requirements for buying condo loans. In addition to the latest changes, factors such as pending litigation, insufficient insurance coverage, or too many owners behind on HOA fees can make a building"non-warrantable," or ineligible for conventional financing. There are no restrictions on listing a non-warrantable condo, but its pool of potential buyers is limited. Without access to Fannie- and Freddie-eligible mortgages, buyers must either pay cash or seek out specialized, higher-rate mortgages.
Many don't want to clear those hurdles.
"If the building doesn't qualify, people are usually walking away, even if they're cash ," said Griffin Wallace, a South Florida-based real estate agent. "They don't want to deal with it. " But he's optimistic that Florida's condo market will be able to adjust to the latest changes, as many condo buildings had already been undergoing major inspections and shoring up reserves to"There is still a lot of appetite for condos that are taken care of," Wallace said.
"If the building has been taken care of, they've been budgeting for this. " For both prospective condo buyers and sellers, the key to keeping a deal running smoothly is to learn about the HOA and begin gathering necessary paperwork as early as possible, agents and lenders told Yahoo Finance.
One of the first conversations Justyn LeFebvre, a Realtor with Christie's International Real Estate in Austin, Texas, has with his condo sellers is about what they know about their HOA's finances.
"The biggest bottleneck is the HOAs themselves producing these studies," LeFebvre said. Texas isn't among the more than half-dozen states that have enacted new condo safety or reserve laws in recent years, so the new financing rules may come with a learning curve there.
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