New federal rule makes it harder for average buyer to purchase a condo — while also raising liability concerns for owners.
While it’s too soon to know its full impact, an obscure letter sent to lenders by Fannie May in October could have serious long-term consequences for people looking to buy or refinance condominiums, particularly those without the means to come up with bigger down payments or pay cash.
The letter, which spells out new requirements to qualify for a loan on condos, was issued in response to the collapse of the 12-story Champlain Tower South collapse in Surfside last year. But the rule, industry analysts in Florida say, puts an unfair burden on certain buyers and could have a chilling effect for building owners and associations who must provide the documentation required for these loans.
For now, given the state of the housing market, the rule is unlikely to have an immediate impact on Florida. To put it bluntly, that’s because there are enough cash buyers and enough buyers with deep financing sources that sellers can look past a buyer whose purchase is contingent on meeting the new requirements.
“There’s such demand and low inventory I think the government could come out and say, ‘Well if you buy the condo you can’t live in it for three years” and it wouldn’t slow the market,” says Denny Grimes, a prominent Realtor in Lee and Collier counties. “So it may be a technical issue that someday somebody is going to be concerned about, however that day is not now.”
The letter, LL-2021-14, is an advisory sent out in October to lenders working with Fannie Mae, a federal government-backed organization officially known as the Federal National Mortgage Association. The rules went into effect in January. Freddie Mac, the Federal Home Loan Mortgage Corp., has followed suit.
What the rule does is require banks, borrowers or building owners to provide detailed records about a building’s maintenance history, repairs and how future maintenance will be paid for before it buys a loan for the original lender.
Fannie Mae and Freddie Mac don’t originate loans, instead those entities buy mortgages on the secondary markets and guarantee them. The loans, though, have to meet the specific requirements of the two government-sponsored enterprises.
The letter also says buildings found “with significant deferred maintenance or in projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions are not eligible for purchase. These projects will remain ineligible until the required repairs have been made and documented.”
The new requirements are called temporary in the letter but industry analysts in the say it is hard to imagine them being rescinded any time soon and that is was likely deemed temporary in the first place to make the rule effective faster.
The problem, according to some analysts, is because these requirements are only for loans underwritten by Fannie Mae, they are going to disproportionally affect those buyers who don’t have the financial resources to use other means to pay for their condo units. It also affects those who need money and are trying to obtain equity loans.
Many of those people are older buyers, first-time buyers and lower-income buyers who rely on the terms offered to banks by Fannie Mae. This comes at a time when it’s becoming increasingly difficult for those buyers to afford housing. The concern is that banks will either be more reluctant to finance or refinance mortgages because of fears that Fannie Mae and Freddie Mac won’t buy the loan once it’s been issued because it failed to meet the requirements.
While there are obvious drawbacks for buyers, the new rule also means more work for the banks and could make building owners and those who run them liable should something go wrong.
"The government could come out and say, 'Well if you buy the condo, you can’t live in it for three years,' and it wouldn’t slow the market." —Denny Grimes, a prominent Realtor in Lee and Collier counties
Fannie Mae, according to its annual report for the year ending Dec. 31, “provided $1.4 trillion in liquidity to the mortgage market in 2021, which enabled the financing of approximately 5.5 million home purchases, refinancings and rental units.” In the single-family category, 9% of its business came from condos and co-ops.
But it’s not just buyers who are impacted by the new rules.
Amanda Buffinton, a partner at the Tampa law firm Shutts & Bowen and an attorney who's worked for more than 20 years in construction law, says lenders who intend to issue loans on condominiums and resell them to Fannie Mae or Freddie Mac must provide documentation that the buildings meets the new standards. The directive advises banks to dig through six months of association meetings minutes; look for maintenance or construction affecting structural integrity; and find inspector, certification or engineering reports for the past five years. The two also provide guidance to appraisers who must document deferred maintenance and special assessments.
Fannie Mae has always had a condominium project questionnaire for loans its underwriting, Buffinton says. But it has added an addendum setting forth exactly what it is looking for in terms of building safety, soundness, structural integrity and asking if there are structural deficiencies and when was the last inspection.
That questionnaire goes to directly to the associations, owners or property managers if a person wants to buy a condo and the lender wants Fannie Mae to underwrite the loan.
The property owner needs to “give all the guts: ‘This was our last inspection, these are the findings, this is when we have to repair, this is our assessment policy, this is our budget reserve, this is our funding plan for deferred maintenance,” says Buffinton.
“It goes into detail for about three pages of things the association has to provide.”
According to industry analysts, though, what’s happening is a great many condominium associations, owners and property managers are refusing to fill out the questionnaires. That's because they know the ramifications of a mistake and because there are long lines of buyers.
From a litigation standpoint, Buffinton says the questionnaires need to be filled out carefully because if something goes wrong it could open the association up to liability if the questions weren’t answered properly or the due diligence wasn’t done properly.
There’s also the matter that information put in writing, if there is ever a disaster, could be dug up and misrepresented.
“There’s ramifications in that aspect that we can only think of, right? This is just starting," she says. “We’re not sure how it’ll play out.”
Asked what advice she’d give a potential client on the questionnaire, Buffinton says in a follow-up email that “I would advise HOAs to consult with their association counsel regarding how the forms should be completed. If the association determines that it should complete the form, it should be cautious about the accuracy of the responses.”
Which brings us back to who this new rule is meant to help and who pays the price for it.
The rule is, obviously, meant to bring more scrutiny to building maintenance, safety issues and associations’ preparedness to deal with problems when they arise — or long before. The state legislature and county governments are also working on these issues with legislation that includes making sure associations have enough money set aside to tackle issues with their buildings.
But one analyst who asked not to be identified says what this rule really does is make it harder for the kind of buyers who are already facing headwinds as they look for affordable housing options and face big-dollar competition from out-of-state or more financially steeled buyers. The idea that buying a home in Florida is becoming less affordable to Floridians and if you don’t own a home now or if you haven’t sold one in California for a large sum of money, it’s not going to be easy for you here, is one already gaining credence among many in real estate.
And a rule like this, well intentioned as it might be, makes it a whole lot less easy.