Why This Recent Change Just Made It Harder To Buy Or Sell An Apartment
(CBS Sacramento/CNN) -- New rules rolled out earlier this year by mortgage giants Fannie Mae and Freddie Mac are creating a bottleneck in the real estate market for those seeking to buy or sell condo or co-op apartments, according to agents and condo associations.
The new rules are intended to address concerns about aging building infrastructure in the wake of the collapse of Champlain Towers South condominium in Surfside, Florida, last year. In order to protect buyers and lenders, the rules ask condo and co-op boards to disclose any known significant deferred maintenance issues that may impact the safety and structural integrity of the building and the financial plans for addressing them, according to Fannie Mae.
"Freddie Mac's requirements are designed to help ensure residential buildings with aging infrastructure are safe for its residents and that condos and co-ops needing critical repairs have a plan to do so," a Freddie Mac spokesperson said.
But many condo and co-op associations are refusing to fill out the form. That's preventing buyers and sellers from closing deals.
Condo associations say they find the required documentation burdensome and are worried the discussion of reserve funds and building integrity puts them at risk of liability, said Nancy T. Polomis, a Minnesota attorney who represents condo boards. Critics also object to the one-size-fits-all form that applies to all buildings with five or more attached units without distinctions for the type, location, or age of a building, she said.
"It seems like Fannie Mae and Freddie Mac took a big chunk to deal with a small bite problem," Polomis said.
While lenders and condo boards are in a standoff, it is sellers and buyers who are suffering, as their deals fall apart because their lenders won't close the loans without the completed forms.
Freddie and Fannie guarantee or buy mortgages from lenders, making the loan less of a risk to issue. If the loan doesn't meet the new requirements and the mortgage giants won't back it, the lender often won't issue the loan.
"If I were a homeowner trying to sell my condo and this was preventing me from doing so, I would be furious," said Polomis. "I'd be upset with my association, but the association board has a fiduciary duty to do what is best for the entire association. Everyone is doing a dance of balancing the risk and liabilities."
Nowhere is the real estate squeeze felt more than in the Sacramento region. In late 2021, Sacramento topped the list of the least affordable new home markets in the country. Late last year, the typical cost of renting an apartment was higher than in Seattle, Washington D.C., and New York City.
Buyers and sellers in a bind
The temporary rules, which went into effect at the beginning of January for Fannie Mae and at the end of February for Freddie Mac, are expected to become permanent. And they are already having an impact on the market, said Chris Muellenbach, a broker with Compass.
"The condo associations are outright refusing to fill out the addendum," said Muellenbach. "It is happening regularly and it will continue to happen."
An $850,000 condo in Milwaukee was perfect for a couple Muellenbach was working with. But the building's board would not complete the additional form, preventing the buyers' loan from closing and threatening to derail the sale.
That left the buyers with two options: pay cash for the property or find a lender that is going to hold the loan. Banks, credit unions, and private lenders may offer loans that aren't guaranteed by the mortgage giants, but they often carry a higher interest rate.
Muellenbach's buyers opted to purchase with cash and complete the transaction. But most buyers can't afford to do that.
"If you are struggling to buy a $140,000 condo, you don't have the resources for that," he said.
Muellenbach said he is reaching out to smaller local lenders who have better firsthand knowledge of area buildings than large national mortgage companies located in other parts of the country.
"There is a small handful of local banks here that will close the loan for people buying condos," he said.
But ultimately it is the sellers who will feel it most, he said, because the new rule cuts deeply into the pool of potential buyers for their apartments.
"I feel for the sellers because of the money they have to leave on the table," said Muellenbach. "The number of potential buyers has decreased significantly. If they can't get a conventional loan on the place, you're losing out on a lot of buyers."
Condo associations request delay
The rules are causing such confusion that a national organization representing condo associations has requested the Federal Housing Finance Agency (FHFA), the government regulator that oversees Fannie and Freddie, pause the rules for a year.
"Creditworthy borrowers have been denied credit to purchase homes and refinance mortgages in condominium and cooperative projects with no safety, soundness, structural integrity, or habitability concerns because of the temporary guidelines," wrote the Community Associations Institute in a letter to FHFA.
Dawn M. Bauman, CAI's senior vice president of government and public affairs, said the rules may have the unintended effect of pushing more cash buyers, including investors, into the condo market at a time when inventory is very low.
"Condos are an affordable housing option in many markets, especially for first-time homebuyers, people with moderate income levels and seniors," said Bauman. "People coming in with all-cash offers are not the people who need affordable options."
An FHFA spokesperson said the agency is committed to ensuring and prioritizing the financial and physical safety of borrowers and occupants of condominiums and cooperatives.
"The tragic June 2021 collapse of the Surfside condominium project demonstrated the need to strengthen measures to protect borrowers and occupants of condominiums and cooperatives and reduce the risks to Fannie Mae and Freddie Mac," the spokesperson said.
The policy changes that Fannie Mae and Freddie Mac implemented earlier this year increase standards for condos and the amount of relevant information needed from building managers in an effort to reduce the negative financial impacts to borrowers when a building's reserves are not adequately funded, also to minimize the potential loss of life due to major deferred maintenance, the spokesperson said.
FHFA said it is working with the mortgage giants to minimize industry disruptions related to the questionnaires so that condominium associations, lenders, and others more clearly understand the policy changes as it considers appropriate permanent policies.
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