Is Your Condo Blacklisted?
It has come to light that Fannie Mae and Freddie Mac hold a secret list of condos and co-ops which they will not underwrite with mortgages. To understand the functions of Fannie and Freddie is most important. In essence, they purchase the mortgages that banks give to homebuyers which allows banks the liquidity to loan funds to other buyers. Fannie and Freddie may hold the mortgages in their portfolios or sell them as mortgage-backed securities (MBS) on the open market to other investors or speculators. Fannie and Freddie provide financing for 70% of home loans in the country.
So why is there a blacklist? The reasons include inadequate financial reserves, inadequate insurance, too many delinquencies, too much commercial space, structural or construction issues, outstanding special assessments, and too high a percentage of rentals. They both have strict requirements regarding finances and physical conditions at condos and coops to ensure the investments are secure. Importantly, most banks won’t lend if a condo doesn’t meet Fannie or Freddie standards.
No one thinks it’s a coincidence that after the Surfside disaster, both Fannie and Freddie stiffened requirements for condos and co-ops to qualify for lending. New rules require buildings to fill out extensive forms detailing both building and financial conditions before mortgages or other loans can be approved.
The list includes about 2,306 properties, 34% of which are in Florida. The reason for the preponderance of Florida properties is unknown at this point. But perhaps the Champlain Towers collapse in Surfside in 2021 focused the attention of Fannie and Freddie on the state.
Since the collapse, the Florida Legislature has responded by passing sweeping reforms and guidelines about the maintenance of condos. For example, a reform bill passed by the Florida Legislature last year now requires older condos to periodically prepare studies of needed maintenance and set aside reserves to cover the work. Starting in 2025, reserves must be set aside to cover 100 percent of anticipated structural work.
But the two quasi-governmental entities will finally make the list of blacklisted properties available to the public sometime in 2024. Condo boards should hold a special interest to see if they are on the list so that they can take steps to remedy the situation. If not, their units will be ineligible for financing from the two biggest guarantors of mortgages in the country.
Of course, being on the list would certainly serve to lower the property value of a given unit. Therefore, boards on the list would be wise to remedy the situation once it is revealed in 2024.
All this is well and good. But there is still a problem. For example, if a given condo needs to make substantive repairs and hasn’t set aside enough funds, they may be denied a Fannie or Freddie backed loan for those repairs because they currently don’t meet the requirements to be removed from the blacklist. Add to this the fact that current interest rates are very high.
Clearly Fannie and Freddie need to not only make the list public, but also to offer some kind of loan accommodation for the affected condos and co-ops for the necessary fixes.
To my dear readers: Happy holidays and a very happy, healthy, and prosperous new year.