The mortgage industry has generally supported Fannie Mae and Freddie Mac's more flexible roof insurance requirements for all single-family mortgages, but some condo market stakeholders have questioned certain other changes announced alongside it.
First flagged by a community lenders group shortly after
"The insurance changes will allow more people to have access to funding for condos. There are, however, other challenges I see. One is the retirement of the limited review," said Dawn Bauman, CEO of the Community Associations Institute.
Where condo rules are tighter
Bauman said she heard from one large lender that around 40% of their condo loans are done through the limited or streamlined review process, which are the respective names Fannie and Freddie have used for the exception and requests to associations for information could surge as a result of the change.
"By causing all condominium loans to produce the full set of project documents, what you're effectively doing is causing a huge cohort of buyers and owners to provide them," said Taylor Stork, chief operating officer at Developer's Mortgage. "Those documents are not inexpensive."
However, a source close to the matter said some mortgage industry feedback indicated that "the streamlined review process offered little difference from a full review, as lenders still needed to reach out to HOAs for details on critical repairs and special assessments."
A second largest concern that Stork, Bauman and some others active in the condo market brought up was related to tighter standards for a building's financial reserves.
In situations where a reserve study is necessary, an association's information will have to show it relies on the highest recommended amount rather than using the current baseline approach that allows reserves to approach zero. This requirement also becomes effective Aug. 3.
These studies can come into play when condo reserves don't meet the GSEs' minimum 10% requirement. With this requirement increasing to 15% starting Jan. 4, 2027, reserve studies could become more frequently needed in addition to having a higher bar to meet.
"Reserve studies are really expensive and not many homeowners associations do them because they're cost prohibitive," said Max Leaman, CEO of LoanPeople, an Austin-based lender.
The GSEs also announced new servicer requirements for monitoring property insurance on condo loans after origination, effective Jan. 1, 2027 that add work. The maximum allowable deductible for unit owners was recently set at the greater of 5% of coverage or $2,500.
Possible motivations behind the changes
While the GSEs aim to support affordable housing in streamlined ways, they also have a responsibility to safeguard loan performance. They've found balancing the two tricky
It's generally agreed that coverage allowing for depreciation in the costs of single-family roof had become a must given that insurers simply weren't allowing it in some circumstances, but that break on coverage does risk an inability to pay for repairs.
So the GSEs full set of rule changes for condos did aim to tighten on standards aimed at increasing the chances of repayment and ensuring they have a handle on building finances.
Additionally, removing limited reviews ultimately ends an exception process that had put the Sunshine State on an uneven playing field by requiring borrowers there to make far higher payments there to qualify for it than elsewhere, according to Rep. Byron Donalds, R-Fla.
After Surfside, lenders increased LTV requirements for limited reviews far above other states.
Donalds said in a press release that he welcomed "decisive action to ensure prospective condo owners in Florida are subject to the same terms and conditions as the rest of the nation."
Room for compromise?
Stork acknowledged that there are some arguments for ending limited reviews such as data access, but he added that at the time he spoke to this publication, the last responses he'd seen on an informal LinkedIn survey he posted on the topic showed opposition was more common.
He, Bauman and Leaman all separately said they understood the big picture that led to the ending limited reviews and tightening up some condo standards to partly offset the insurance change, but they said they still see reasons to find more of a middle ground.
Bars that are too high could add financial pressures to condos that could hurt not only new borrowers by shutting them out of the market or moving them into the higher-cost
"The combination of no limited review and 15% reserves is a problem, and there should be some sort of compromise," said Leaman. "I get what they're doing right, but I think there is another way to go about it where there are no unintended consequences."
