A Miami-based private lender explains why creditworthy condo buyers keep ending up in non-QM and private lending
The condo market has been in the news lately thanks to recently implemented changes by Fannie Mae and Freddie Mac. In South Florida, they’ve been working through headwinds in the condo space for a while.
Buying a single-family home in Miami is not the same financing challenge as buying a condo there. The lender pool is different, the underwriting considerations are different, and for condos specifically, the path to closing has been narrowing for years.
A combination of post-Champlain Towers regulatory sensitivity, special assessments on aging buildings, and a wave of new construction coming to market as non-warrantable has pushed condo financing into a tiered system where conventional lending is often the first option to fall off the table.
What fills the gap is a layered set of alternatives, with portfolio banks, non-QM lenders, and private lenders picking up the slack. For creditworthy borrowers and the brokers working with them, finding the right financing can be a challenge. For private lenders on the ground in South Florida, none of this is new.
Zack Simkins (pictured top), managing director at Vaster, a Miami-based private lender, said the condo financing problem in his market has two distinct issues, with the first being special assessments even on newer properties.
"There are two main issues happening right now in the South Florida condo market," Simkins told Mortgage Professional America. "One, on existing condominiums, a lot of them — even more recent builds from the past 10 to 15 years — are getting hit with special reassessments because everyone is still sensitive to what happened at the Champlain Towers.
“Now everyone's making sure we're well beyond the code expectations for the quality of the buildings. But that gets passed on to the owner. And that creates sensitivities and hesitation by some lenders to offer traditional financing."
The non-warrantable condo problem
The second issue involves the challenges of getting financing with agency loans. Older buildings are being demolished, and new condos are coming to market classified by Fannie Mae and Freddie Mac as non-warrantable.
"When these condos get finished, they become classified as non-warrantable," he said. "That means you can't package them out yet and sell them in the mortgage-backed security pools. And that limits the lender profile and lender opportunities."
The result is a cascade from conventional to non-QM to private lending, with each tier carrying higher costs than the last, and hard money waiting at the end of the line.
"You have to shift into the other tiers of financing such as non-QM, which are more institutional-backed lenders that hold things on their balance sheet and maybe not as risk-averse as conforming lenders," he said. "And then you shift beyond non-QM into private loans, which is my area of expertise, as the last opportunity before you get to a hard money loan."
He said the recent changes to condo financing rules by the GSEs are bringing something that South Florida has been dealing with for a while to a national level.
"What's been occurring in South Florida regarding the condo financing market has been like that for the past few years," he said. "It's just being exemplified more at the national level and maybe expanding beyond our markets."
Private capital as the backstop
Simkins said private lenders have stepped into the financing gap at multiple levels, not just for end buyers. He said rehabilitation financing for buildings facing special assessments, construction loans for new developments, and land acquisition loans have all shifted toward institutional private capital as banks pulled back.
"A lot of the institutional funds — the Madisons of the world, the Blackstones of the world — are essentially offering financing alternatives for developers," he said. "Private lenders have stepped up not only on offering solutions from the buying pool, but also on the association perspective with reassessments and rehabs, but also on the development side as far as bringing new product."
He said without that private capital, the gaps in the market would create more serious problems, not just for buyers but for the overall health of the market.
"The private debt space has provided a significant impact on the market, avoiding gaps where there could be a possible problem if there wasn't such a vast willingness to lend in the private lending space to help keep these projects afloat," he said.
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