New regulations introduced earlier this year by mortgage giants Fannie Mae and Freddie Mac are causing delays in the real estate market for those looking to buy or sell condominium or co-op apartments, according to real estate agents and condo associations.
These new rules, aimed at addressing concerns about aging building infrastructure following the Champlain Towers South collapse in Surfside, Florida, require condo and co-op boards to disclose any significant deferred maintenance issues that could affect the building’s safety, structural integrity, and financial plans.
“Freddie Mac’s requirements are meant to ensure that residential buildings with aging infrastructure are safe and that those needing repairs have a clear plan in place,” explained a Freddie Mac spokesperson.
However, many condo and co-op associations are refusing to complete the required forms, which is blocking transactions. These associations argue that the documentation is burdensome and that discussing reserve funds and building integrity could expose them to liability, according to Nancy T. Polomis, a Minnesota attorney representing condo boards. Critics also take issue with the uniform form that applies to all buildings with five or more units, regardless of their type, location, or age.
“It seems like Fannie Mae and Freddie Mac addressed a broad issue with a one-size-fits-all solution,” Polomis said.
As lenders and condo boards are at an impasse, buyers and sellers are suffering as deals collapse due to incomplete forms. Fannie Mae and Freddie Mac, which back or buy mortgages from lenders, have set these requirements to mitigate risk. If a loan doesn’t meet the new criteria and isn’t backed by these agencies, lenders are often unwilling to issue it.
“If I were a homeowner trying to sell my condo and faced with this issue, I would be furious,” Polomis said. “I’d be frustrated with my association, but the board has a duty to the entire community. It’s a delicate balance of managing risk and liability.”
The new rules, effective January for Fannie Mae and late February for Freddie Mac, are expected to become permanent and are already impacting the market, said Chris Muellenbach, a broker with Compass.
“Condo associations are refusing to fill out the addendum regularly,” Muellenbach noted. “This will continue to be a problem.”
For instance, an $850,000 condo in Milwaukee was ideal for one of Muellenbach’s clients, but the building’s board wouldn’t complete the required form, preventing the buyers’ loan from closing and jeopardizing the sale. The buyers had to choose between paying cash or finding a lender not backed by the mortgage giants, which typically results in higher interest rates.
Muellenbach’s clients opted for a cash purchase, but most buyers can’t afford that option. He’s now reaching out to local lenders with better knowledge of area buildings.
“Local banks may be more willing to close loans for condo buyers,” Muellenbach said. “But ultimately, it’s the sellers who lose out because the new rules reduce the pool of potential buyers.”
The confusion caused by these rules has prompted a national condo association to request that the Federal Housing Finance Agency (FHFA) pause them for a year. The Community Associations Institute (CAI) expressed concerns that creditworthy buyers are being denied loans due to the guidelines.
Dawn M. Bauman, CAI’s senior vice president of government and public affairs, warned that the rules might inadvertently push more cash buyers, including investors, into the condo market during a time of low inventory. “Condos provide affordable housing options for many, and cash buyers are not typically those who need affordable options,” Bauman said.
An FHFA spokesperson stated that the agency is focused on ensuring the financial and physical safety of condo and co-op occupants. The spokesperson emphasized that the policy changes aim to strengthen protections for borrowers and reduce risks for Fannie Mae and Freddie Mac. FHFA is working with the mortgage giants to minimize industry disruptions and clarify the policy changes for all stakeholders.
