It’s not surprising that as time goes on, more and more of what I’ll call “collateral damage” surfaces related to the Surfside building collapse on the east coast. This time, it’s related to mortgage qualifying regulations.
Fannie Mae and Freddie Mac, the quasi-government agencies that set the standards for residential mortgage financing, are asking questions about the viability of condo buildings before approving financing. Specifically, they said they would stop buying mortgages from lenders in buildings with significant deferred maintenance or safety issues.
Fannie and Freddie have provided lenders with new in-depth questionnaires to be completed by condo management companies, associations or boards about the condition of the building where financing is being requested. The Catch-22 on this is that the individuals responsible for filling out the form aren’t sure of how – or are indeed qualified – to answer all the questions. Some of the questions really need to be answered by a structural engineer, or at the very least, a home inspector.
This is a huge potential problem for buyers requiring financing on a condo since the lenders are worried about their financial exposure related to the condition of the buildings they hold the mortgage on. This is already slowing up the loan approval process, particularly for condos in the more affordable price ranges. Of course, this could have a negative impact on the condo market for both condo values and the ability to sell.
Another aspect of this is how mortgage qualifying regulations will affect volunteer board members and management companies. The more complicated the process and the more likely the risk of liability the more difficult it will be for associations to recruit residents to serve on a condo board. In addition, management companies will have to ramp up their staff to understand and complete additional paperwork. This additional work will certainly be billed back to the associations.
Fannie and Freddie have taken the position that these measures are meant to protect residents from unsafe buildings and to ensure that aging condos are undergoing the necessary repairs and are funded to do so. They have indicated that they will work with associations to minimize disruptions related to the questionnaires, but how long that will take is anyone’s guess.
Fannie Mae and Freddie Mac have enormous power in the real estate market and although they do not set building codes, they do have the power of the purse when it comes to approving financing. Since they control approximately half of the country’s home loans, and between 7% and 9% of condo and co-op loans, we’re talking about what could be a big impact on the market.
Before you give up on a condo purchase that involves financing, most of what is stated above will not apply to the average condominium association. Buildings that obviously have major structural defects that have been put off and are underfunded will certainly have an issue, but the average building that has been maintained will likely be approved. It may take a little longer for the paperwork to be processed at the beginning, but the end result may actually be beneficial to buyers.
As I’ve said before, collateral damage as a result of the Surfside collapse will be around for a long time, but we’ll get through it.
