Fannie-Freddie changes are presenting challenges, but a prominent mortgage VP says the industry and borrowers will eventually adapt
New lending rules introduced by Fannie Mae and Freddie Mac are making it more difficult for many homebuyers to purchase a condo – and Florida is unsurprisingly one of the markets seeing the biggest headwinds.
As of August 3, review exemptions have been stripped back, meaning lenders can no longer use so-called “limited reviews” for established condo projects with more than 10 units.
Instead, almost all conventional loans now require a comprehensive full review that includes investigating an association’s finances, budgets, insurance, and litigation history.
Homeowners associations (HOAs), meanwhile, must up their reserve allocation requirements – the dedicated part of their budgets set aside to fund future long-term repairs – from 10% to 15% at the beginning of January.
Melissa Cohn (pictured top), the Florida-based regional vice president of William Raveis Mortgage, told Mortgage Professional America the changes could push a significant portion of condo transactions out of the conventional lending channel and into portfolio and non-qualified mortgage (non-QM) territory.
“The most recent changes that Fannie and Freddie have made are going to completely tear up the landscape for the next number of months,” she said.
The limited review option previously allowed lenders to approve condo projects with less extensive documentation. But under the new requirements, all projects must undergo a full review requiring more paperwork and time.
Why Florida could face bigger challenges than elsewhere
In Florida, the standard real estate contract operates on a 30-day closing timeline with time-of-the-essence clauses, leaving little breathing room for the additional processing required by a full review.
Cohn believes that means the new changes will affect Florida more than other markets such as New York, where an automatic 30-day grace period provides more room for maneuver and professional property management companies have historically kept buildings better positioned to meet agency guidelines.
The growth of the non-QM sector has been one of the most significant trends across the US mortgage market in recent years – and Cohn said it’s well placed to absorb demand that conventional lenders can no longer serve in Florida.
“It’s when you don’t have a great buyer and you don’t have a great credit profile that you’re going to have to be a little bit more careful,” she said. “But we have a good number of portfolio and non-QM lenders in our marketplace now, and they will certainly come in and to a great degree fill the void that conventional lenders will not be able to do.”
Brokers, borrowers face challenges in new reality
Lenders, brokers and borrowers are still grappling with the changes and how to handle them. Cohn doesn’t see them causing huge issues in the long run, but said some teething problems are still emerging.
A practical reform that could make a meaningful difference, she said, is providing brokers and buyers with upfront access to condo questionnaires: the documents that reveal whether a building meets agency guidelines.
Currently, HOAs charge fees to provide these questionnaires, creating both a cost burden and a timing problem.
“If we had access to a library of questionnaires up front and could figure that out, then we could be in a much better place,” Cohn said.
“We’d be able to do a better job of doing our homework and understanding ‘What lender can I take this building to,’ without having to have a buyer pay the money for the questionnaire and get all the condo docs to find out it was never going to be a warrantable project.”
The longer-term outlook for condos in Florida, though, isn’t likely to take a hit. Lifestyle demand for condo living isn’t going anywhere, Cohn said, even despite the tightened lending rules.
“Many people prefer to be in a condo. They don’t want to be cutting the grass,” she said. “Anytime there’s a major change, everyone projects that it’s going to be a problem and it’s going to be detrimental and it’s going to hurt the market. But eventually, all the changes get digested and processed. And business goes on.”
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