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In the two years after a notorious Surfside, Florida condo collapse, new temporary rules and increased enforcement have been instituted to ensure building safety, but these measures have also intensified the challenge involved in finding affordable financing in this market.
“There are more and more buildings that don’t meet the warrantable guidelines,” said Melissa Cohn, regional vice president, William Raveis Mortgage, referring to the standards buildings must meet for government-sponsored enterprises to back condominium unit loans.
At the same time the banking crisis reportedly reduced the supply of low-rate condo unit financing.
“You have the secondary market in the last two or three months somewhat collapsing, where you see these banks are starting to fold,” said Orest Tomaselli, president of project approval at CondoTek. “Some of these are banks that have provided residential mortgage financing to owners and purchasers in these condominium developments.”
Borrowers are still able to pay up for other options in the private market but these developments have generally limited the availability of more cost-effective loans for buyers of condo units, Cohn said.
“There are still financial institutions that will lend at market rates in nonwarrantable buildings,” said Cohn. “But they may not drop the rates below market for anyone.”
That’s a concern, because condos can be a source of scarce affordable housing in a high-cost market, and while Surfside-inspired rules as now configured are aimed at making buildings and units safer, some think they run the risk of having a counterproductive impact on financing.
“If it becomes more difficult to make those loans, it will become more difficult for people to enter into the housing system,” said Taylor Stork, chief operating officer of Developer’s Mortgage Company and president of the Community Home Lenders of America. “Most of our borrowers are first-time homebuyers in metropolitan areas and they tend to go toward the housing stock that is less expensive. In those areas, it’s more likely that a condominium will be an option.”
A growing list of “unavailable” buildings
To understand Surfside’s ripple effects in the condo market, consider the list of buildings that don’t meet Fannie Mae’s lending requirements.
The growth in the so-called unavailable list, which is constantly changing in line with the status of different buildings relative to Fannie’s requirements, has drawn attention because it’s caught an increasing number of condo associations and would-be borrowers by surprise.
“Hundreds of buildings have been added since Surfside,” said Tomaselli. “It seems like every day, there’s another one going on.”
Some of the market frustration with the list has stemmed from the fact that only Fannie, lenders and other entities with a permissible business purpose have had access to what traditionally have been called unwarrantable condos and they’ve been loath to share it outside of that.
“Approved parties that access [Condo Project Manager] for project eligibility information are not permitted to disclose Fannie Mae eligibility determination to third parties,” a Fannie Mae spokesman said in an emailed statement. (CPM will become mandatory for full reviews in July.)
The access restriction has meant some buildings have been unaware that they’re on the list until someone tries to finance a unit. The listing isn’t even always related to post Surfside rules, but the increased enforcement of other traditional condo standards in response to the collapse.
The CHLA, National Association of Realtors, and the Community Association Institute have all called for public access to the list and guidance as to how buildings can regain eligibility. (Lenders have said some fixes can be done in time to close a loan but others are more complex.) The trade groups also are asking for a minimum 60 day comment period before any condo lending rule changes.
There’s some precedent for a public list. Unlike Fannie’s technology and Freddie Mac’s platform for condo information, which provides feedback based more on discrete criteria rather than by building, the Federal Housing Administration’s list is public.
The FHA’s specific lookup tool provides information on building approvals and rejections and is designed for specific searches related to a particular property or area. While it has different criteria and costs than the GSEs (of the three, only Fannie and Freddie lend on cooperatives), some of the FHA’s feedback on buildings may mirror theirs.
CPM also is formatted as a lookup tool and its exclusive use mandate narrows the channels through which Fannie loans can get done, Stork said. Not only vendors but some originators who don’t work directly with Fannie, like aggregators or brokers, lack direct access to the system.
The situation can lead to frustration and costs for borrowers because once a loan has property-specific information, lenders tend to start worrying about time-sensitive disclosure requirements and start a more detailed application process. For borrowers in this market, that can come with the usual mortgage costs like the appraisal in addition to, for example, fees buildings charge for supplying certain condo information, said Stork.
“A borrower can easily put $1,000 to $1,500 into a transaction and then learn that it is never going to be approved, and there’s no way that the lender, or the borrower, or even the Realtor could know all of this, in many cases,” Stork said. “First-time homebuyers generally don’t have that money just laying around.”
Fannie’s spokesperson said that it considers lenders it works with to be “in the best position to have conversations with their customers about mortgage finance.”
With the advent of the banking crisis, more private lenders are increasingly likely to pile on if they become aware of Fannie’s approval status for a building, either by seeing it as signifying risks they should charge more for or that they should avoid financing it altogether.
“Being on that list, it sometimes can mean that other lending shuts down in the building as well,” Tomaselli said.
Therein lies a key dilemma in the wake of Surfside: lenders may have less tolerance for giving money to buildings with strained finances just when condos are most likely to need more cash to ensure their structures are sound.
Layers of rules and costs to navigate
Fannie and Freddie’s temporary criteria in response to Surfside have focused on restricting single-family financing for units in buildings that have deferred maintenance and public repair directives related to unsafe conditions.
The GSEs have noted that as they get a better sense of the mitigants that could be used to address the risks in aging condo buildings Surfside epitomized, they could rethink their criteria. Lenders generally would like that to result in some more leeway, but think further tightening might be more likely.
Meanwhile, even with the temporary constraints, the share of condo and co-op loan acquisitions at Fannie Mae has remained largely consistent around 9% as of year-end 2022.
And sometimes those constraints are necessary, lenders agree. As much as the market is short of housing at affordable entry-level price points and the buy-in cost for owning a condo may be lower than a traditional home, if a building’s not sound or ongoing maintenance and assessments won’t be financially manageable for a particular borrower in the future, they shouldn’t get a loan.
“The piece that Fannie Mae’s focused on…is how do we ensure sustainable homeownership,” Jake Williamson, senior vice president, single-family collateral risk management, in an online video forecast about the condo outlook. “Part of that is keeping in mind the ongoing cost.”
Adding to that concern are regional rules that have been put into place in areas where condos are concentrated. Access to this type of housing has been increasingly costly and constrained.
In Florida, June marks not only two years since Surfside, it’s also the 12-month anniversary of the state’s Building Safety Act. Because of its passage, buildings have been grappling with how to make assessments for new structure and reserve requirements affordable to their unit owners
“Each association or board president is going to have to take a damn good look at their resident constituents and figure out what their ability to pay is,” said Greg Main-Baillie, executive managing director for the Florida Development Services Group at Colliers. “Unfortunately, some board presidents could end up putting their buildings into default if they don’t.”
Baille, who acts as an owner’s representative and project consultant for condo associations facing inspections and structural repairs, said he doesn’t deal directly in unit financing, but noted building finances are inextricably linked to those of single-family owners and mortgagors.
State or regional programs that help some unit owners obtain financial assistance to help with assessments could mitigate condo default risk, Main-Baille said. Miami-Dade County has offered up to $50,000 to owners with an area median income of 140% or less.
Condo boards also might want to judiciously use a home equity loan of credit related to their multifamily building mortgage to, for example, extend the amount of time unit assessments can be spread out over, reducing monthly payments for potential future owners, he suggested.
“It may be better for the condo to actually go and leverage that debt on the behalf of their residents than the residents going and sourcing loans themselves, and it’s probably going to be cheaper too,” he said.
While the costs associated with Florida’s rules have been the most prominent so far, given the national impact of Surfside on Fannie’s temporary standards and the wide distribution of states on the unavailable list, it’s likely regional responses will grow too and become a factor in lending. New York City, for example, also has had some problems with aging infrastructure. Local rules were implemented in response to it in the past.
“Florida is really the only one that is pushing this mandate to this level and degree at this point in time…but you just have to wait to find out if more states will start following suit,” Maine-Baille said.
The total number of unavailable buildings in the Sunshine State topped several hundred at the end of May, according to lender estimates. As of May 31, every state but three had at least one building on it. The exceptions were Arkansas, North and South Dakota. The number of buildings listed per state was generally under 100 and sometimes as low as one at that time. The state with the second largest numbers of listed buildings was California, which had over 200.
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