By Anna Bahney, CNN Business
(CNN) – New rules put in place earlier this year by mortgage giants Fannie Mae and Freddie Mac are creating a bottleneck in the real estate market for those looking to buy or sell condos or condominiums, according to agents and associations of co-owners.
The new rules aim to address concerns about aging building infrastructure following the collapse of Champlain Towers South condominium in Surfside, Florida last year. To protect buyers and lenders, the rules require condominium and co-op boards to disclose any known significant deferred maintenance issues that could impact the safety and structural integrity of the building and plans. funds to address it, according to Fannie Mae.
“Freddie Mac’s requirements are designed to help ensure that residential buildings with aging infrastructure are safe for its residents and that condos and co-ops in need of critical repairs have a plan to do so,” said a gatekeeper. word of Freddie Mac.
But many condominium associations and cooperatives refuse to fill out the form. This prevents buyers and sellers from closing deals.
Condo associations say they find the required documentation cumbersome and worry that discussing reserve funds and building integrity could put them at risk of liability, said Nancy T. Polomis, a Minnesota attorney who represents condominium boards. Critics also object to the single form that applies to all buildings with five or more units attached regardless of a building’s type, location or age, she said.
“It looks like Fannie Mae and Freddie Mac took a long time to work out a little biting issue,” Polomis said.
While lenders and condo boards are at an impasse, it’s sellers and buyers who are suffering as their deals crumble because their lenders won’t close loans without the forms completed.
Freddie and Fannie guarantee or purchase mortgages from lenders, making the loan less risky to issue. If the loan doesn’t meet the new requirements and the mortgage giants don’t support it, the lender often won’t make the loan.
“If I was a landlord trying to sell my condo and it stopped me from doing it, I would be furious,” Polomis said. “I would be mad at my association, but the association board has a fiduciary duty to do what is best for the association as a whole. Everyone does a dance to balance risk and responsibilities.”
Buyers and sellers at an impasse
The temporary rules, which came into effect in early January for Fannie Mae and late February for Freddie Mac, are expected to become permanent. And they are already having an impact on the market, said Chris Muellenbach, broker at Compass.
“The condominium associations categorically refuse to complete the addendum,” Muellenbach said. “It happens regularly and it will continue to happen.”
An $850,000 condo in Milwaukee was perfect for a couple Muellenbach worked with. But the building’s board failed to complete the additional form, preventing the buyer’s loan from closing and threatening to derail the sale.
This left buyers with two options: pay cash for the property or find a lender who will hold the loan. Banks, credit unions and private lenders can offer loans that aren’t guaranteed by the mortgage giants, but they often carry a higher interest rate.
The Muellenbach buyers elected to buy cash and complete the transaction. But most buyers can’t afford to do that.
“If you’re struggling to buy a $140,000 condo, you don’t have the resources for it,” he said.
Muellenbach said he’s aimed at smaller, local lenders who have better first-hand knowledge of area buildings than large, national mortgage companies in other parts of the country.
“There are a small handful of local banks here that will close lending for people buying condos,” he said.
But in the end, it’s the sellers who will feel it the most, he said, as the new rule deeply shrinks the pool of potential buyers for their apartments.
“I feel sorry for the sellers because of the money they have to leave on the table,” Muellenbach said. “The number of potential buyers has dropped significantly. If they can’t get a conventional loan on the spot, you lose a lot of buyers.”
The associations of co-owners ask for a delay
The rules are causing such confusion that a national organization representing condominium associations has asked the Federal Housing Finance Agency (FHFA), the government regulator that oversees Fannie and Freddie, to suspend the rules for a year.
“Creditworthy borrowers have been denied credit to purchase homes and refinance mortgages in condominium and co-op projects without any safety, soundness, structural integrity or livability issues due to the temporary guidelines,” wrote the Community Associations Institute in a letter to the FHFA.
Dawn M. Bauman, CAI’s senior vice president of government and public affairs, said the rules could have the unintended effect of pushing more cash buyers, including investors, into the condo market at a time when stocks are very low.
“Condos are an affordable housing option in many markets, especially for first-time home buyers, moderate-income earners and seniors,” Bauman said. “People offering cash deals aren’t the ones who need affordable options.”
An FHFA spokesperson said the agency is committed to ensuring and prioritizing the financial and physical security of borrowers and occupants of condominiums and co-ops.
“The June 2021 tragic collapse of the Surfside condominium project demonstrated the need for stronger measures to protect borrowers and occupiers of condominiums and co-ops and reduce risk to Fannie Mae and Freddie Mac,” the gatekeeper said. word.
Policy changes that Fannie Mae and Freddie Mac implemented earlier this year increase the standards for condominiums and the amount of relevant information required from property managers in an effort to reduce negative financial impacts for borrowers when a building’s reserves are not adequately funded, also to minimize the potential loss of life from delayed major maintenance, the spokesperson said.
The FHFA said it is working with the mortgage giants to minimize industry disruption related to the questionnaires so that condo associations, lenders and others more clearly understand policy changes as it considers policies. appropriate perms.
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