Buying a condo in an older South Florida high-rise? For people who want to finance their deal, it’ll be getting tougher to take out a loan backed by Fannie Mae or Freddie Mac, the government-sponsored enterprises that make mortgages available to low- to moderate-income borrowers.
Reacting to last year’s tragic collapse of the Champlain Tower South in Surfside, Fannie Mae and Freddie Mac, the two companies that back a majority of residential mortgages in the U.S., are scrutinizing deferred condo maintenance issues before approving loans generated by banks and other lenders.
Generally, they will not back loans for condo and co-op units if their buildings have put off major repairs, industry experts say.
Both companies have issued temporary requirements for condo and co-op projects to ensure that buildings are structurally sound, and that associations that govern them have the money to pay for repairs.
The upshot, legal and real estate analysts say, is that some condo buyers around the nation may need to find other sources if they want to finance their purchases. The rules could make it harder for some owners to sell, and place more pressure on condo inventories already tightened by heavy demand.
“It is without a doubt a more heightened scrutiny than what was previously being requested,” said attorney Roberto C. Blanch, who specializes in community association law at the Siegfried Rivera firm in Coral Gables. “The focus is on ensuring the safety and structural soundness and viability of buildings.”
Blanch said that caution is now a byword in the lending community.
“I do believe there is a trickle-down effect in the industry,” he said. “There is this heightened sense of caution among most lenders. The total universe of available lenders has been impacted as a result of this collapse as well as by the resulting oversight.”
But thus far, the ripple effect on condo transactions has been minimal around the state, said Christina Pappas, the new president of the Florida Realtors, an industry trade group. She said residential units in 400 buildings in Florida have been deemed ineligible by Fannie Mae for loans. Information about their locations and identities was not immediately available.
“I think ultimately what we’re seeing is if the condo is following their maintenance requirements, we haven’t seen any problem,” Pappas said. “If they are in the middle of a 40-year re-certification, that is where we run into some more digging by the lender.”
Bess Freedman, CEO of the New York-based Brown Harris Stevens brokerage, which maintains a substantial South Florida presence, said the requirements “could slow things down,” but she’d rather the industry err on the side of safety.
“I’d rather have slow and safe versus fast and collapse any day,” Freedman said, “I think these requirements do a very good service.”
On January 1, Fannie Mae stopped backing loans for condo units in buildings where significant repairs have been deferred or are under directives from a local government agency to make repairs due to unsafe conditions. The Freddie Mac measures go into effect for loans settling starting Feb. 28,
Neither company will green-light loans until the necessary repairs have been completed and documented. Their new policies are in place until further notice.
Freddie Mac’s requirements exclude from eligibility for acquisition by investors any loans for units in communities considered to have critical repair needs, Blanch wrote in a blog for his firm’s website.
“Subsequently, properties that have already identified elements requiring attention and begun their construction and remediation efforts may become ineligible until such repairs and renovations are completed,” he said.
After the Surfside collapse, questions about the structural integrity of older condo buildings in Florida and elsewhere surged to the forefront of the public discussion of why and how a decades-old building could suddenly plunge to the ground.
Analysts, experts and critics focused on deferred maintenance, the sheer expense of major repairs and scant attention paid to red flags in inspection reports.
Last December, a Miami-Dade County grand jury issued a lengthy list of recommendations aimed at preventing another high-rise condominium collapse, including earlier and more frequent inspections and better waterproofing.
In its report, the panel called on state and local officials to require condominium tower management to arrange an initial recertification inspection by an engineer between 10 and 15 years after construction and every 10 years thereafter. Currently, Miami-Dade and Broward counties require inspections at 40 years. Other Florida counties have no requirement.
In Broward County, a task force spent weeks studying safety issues. Among proposals sent to the Legislature: condos would be inspected every 30 years, with re-inspections every 10 years.
Boca Raton created an ordinance requiring safety and structural inspections for every building older than 30 years and taller than three stories or 50 feet. Priority for inspections will be given to buildings near the ocean, which are most susceptible to saltwater corrosion.
In an emailed response to questions from the South Florida Sun Sentinel, Fannie Mae suggested that the Surfside disaster was emblematic of a national problem.
“While the temporary requirements were put in place in the wake of the tragic collapse of the Champlain South Tower in Surfside, residential buildings with aging infrastructure and significant deferred maintenance are a growing concern across the nation,” Fannie Mae said.
“This concern is expected to increase over the next decade, as the majority of residential condo and co-op buildings were built more than 20 years ago.”
Both Fannie Mae and Freddie Mac drafted and made public their requirements last October, but did not move to activate them until this year.
Created years ago by Congress, Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., are government-sponsored companies designed to support borrowers by providing liquidity to lenders. The main difference between the two is that Fannie Mae buys mortgages from larger commercial banks, while Freddie Mac buys them from smaller institutions.
The onus is on lenders
Their new requirements call for banks and other lenders to collect detailed information about a building’s structural integrity, special assessments for condo association members and “reserve funding” maintained by the associations for major special projects.
“Lenders are responsible for confirming that condo and co-op projects meet Fannie Mae’s eligibility requirements,” Fannie Mae told the Sun Sentinel.
Frank Simone, general counsel, KW Property Management & Consulting, which represents 225 associations that oversee 90,000 units in Florida, said the additional scrutiny was expected.
“Any time there is a huge tragedy, every lender, every insurance company, and anyone who has any risk vis-a-vis these properties are going to tighten their underwriting requirements,” he said.
The Fannie Mae and Freddie Mac requirements apply to condominiums and co-ops with five or more attached units. Townhomes and traditional single-family home associations are not subject to them.
Both companies will disqualify buildings for financed unit purchases under a variety of circumstances. They include:
• The full or partial evacuation of a building.
• Deferred repairs or damage that affects a building’s structural integrity.
• A building is in need of substantial repairs in structural or mechanical categories such as the foundation, roof, electrical system, air conditioning system or plumbing.
The companies will also rule out loans in units of buildings that failed to pass local inspections or meet recertification requirements.
A closer look at association finances
Fannie Mae and Freddie Mac are both requiring reviews of any current or planned special assessments for a building’s condo owners, the financial stability of the condo associations, and the existence of financial reserves, which many owners are reluctant to pay.
They will want to know why assessments were imposed, how much they cost and when and how they should be paid.
In its statement, Fannie Mae said its focus on building association finances isn’t new.
“Fannie Mae’s longstanding project eligibility requirements are designed to support the ongoing viability of condo and co-op projects,” the company said. “To maintain homeownership sustainability, we have long required scrutiny of project reserves on loans delivered to us, as well as disclosure of any special assessments and review of a number of other important project characteristics that would impact mortgage borrowers.
“Our latest guidelines reinforce our project reserve requirements in response to emerging concerns about aging condo infrastructure.”