New mortgage rules could make homes less affordable
It’s a tough time to be house hunting. Prices have reached record highs. Mortgage rates are rising.
Less visibly, the new Fannie Mae and Freddie Mac rules also make it harder to buy condominiums, which are often how first-time buyers enter the real estate market.
Federally chartered mortgage companies attempt to verify the physical and financial soundness of condominium buildings before securing loans on the units. But the co-owners and the associations they hire to manage their buildings have trouble complying with the rules. Many choose not to participate in loans backed by Fannie or Freddie.
This makes condominium mortgages more difficult to obtain and puts homeownership out of reach for millions of people.
The demand for condos continues to increase. The supply of condos for sale is decreasing more rapidly than that of single-family homes.
Like all commercial and residential buildings, condos must be safe and structurally sound. That’s why the law currently requires extensive building codes, inspection standards, maintenance schedules, building permits, federal housing regulations and more.
Fannie and Freddie have a stake in the structural and financial soundness of condominiums, of course. Companies and their investors ultimately receive the monthly mortgage payments made by each condo owner. A building that is decrepit, or that doesn’t have enough money to maintain, is a risk to the occupants, to that stream of future payments, and to taxpayers everywhere.
But Fannie and Freddie’s new rules are creating problems for the condo market. If they determine that a condominium has a potential physical or financial risk, they will not guarantee the mortgages on the units in that building.
Condominiums must undertake and document repairs to Fannie and Freddie’s satisfaction in order to be removed from this list of “risks”. To prove that they are up to date, condominium associations are asked by lenders to complete vague and detailed questionnaires detailing building maintenance and inspection records as well as information on financial reserves. Answering these questions usually requires the assistance of legal counsel – and that can be very expensive.
Some condominium associations refuse to sign documents attesting to the security and financial soundness of their buildings because they are unable to provide the information that Fannie and Freddie request.
The result is that many owners cannot sell and buyers cannot obtain financing. Lenders won’t make loans if they can’t sell them to Fannie and Freddie.
Low- and middle-income Americans will pay the heaviest price for these rules. Condo purchases are often how they begin the process of saving and building generational wealth. Instead, they can watch wealthier, all-cash buyers and investors snap up properties they might otherwise buy.
Sellers, on the other hand, have fewer potential buyers. This keeps their properties on the market longer – and can lead to lower selling prices. Some may not be able to find buyers at all.
Tightening the housing balloon in this way also puts upward pressure on the price of single-family homes, as potential buyers turn away from condos, unable to obtain financing.
Finally, co-owners may find that this lender reluctance limits their ability to access the equity in their home. Such loans can be critical during a special appraisal for, for example, a new roof.
In this way, Fannie and Freddie’s new rules could actually undermine condominiums’ efforts to stay current on maintenance.
Since announcing the new rules, Fannie Mae has acknowledged their unintended negative consequences. It’s a beginning. Next, the mortgage giants must revise these rules to maintain the security homeowners need without excluding millions of people from the housing market.
Kaki Lybbert is the 2022 Vice President of Advocacy, National Association of Realtors® and Realtor® in North Texas.