In the four years since the Surfside condo collapse, a wave of regulatory changes continues to unsettle property owners and lenders, compounding challenges in an already fragile housing market.
The scrutiny on condo developments in the aftermath of Surfside led to tightened lending rules that continue to put properties across the country
A host of factors, from inadequate insurance coverage or financial reserves within individual properties to ongoing litigation or the number of rentals in a building, could land a development on the list, often unbeknownst to owners, residents and the homeowners associations that govern them. Unit owners and buyers then find themselves forced to reevaluate the purchase or abandon plans altogether, as they face more stringent lending requirements.
READ MORE:
With the majority of loans originated in the country guaranteed by Fannie Mae or Freddie Mac, the effect of such uncertainty is having a detrimental effect, destabilizing condo markets and greater home affordability, according to Dawn Bauman, chief strategy officer at the Community Associations Institute, a trade group serving HOAs.
"It is already creating a property-value issue in some of these buildings, and that will continue if Fannie and Freddie don't become more flexible in these few requirements that they have."
Still, nonwarrantable condos offer lenders a growing niche, with strong interest from those specializing in this unique corner of the mortgage market.
But making changes to some of the onerous rules creating today's challenges needs to be at the top of the list of priorities in order to balance lending opportunities with a healthy condo market, Bauman said.
Nonwarrantable lending presents opportunity and challenges
Historically, nonwarrantable condominiums garnered interest from participants in the
Among the top homebuyers in the space are
"A majority of our clients that are buying these types of properties are going to be your real estate investors that are mainly using the DSCR for these types of properties," said Erik Björklund, vice president of mortgage lending and a nonwarrantable condo specialist at Fidelity Home Group, which operates exclusively in the Florida market.
"We have a multitude of investment groups we work with. They all kind of share the resources or information where we're one of their main lenders out there, just because we have these different types of loans specifically for investors that really don't focus on their debt-to-income ratio."
Outside of Florida, which is regarded as an outlier in the national housing market due to the unusually large number of investors and second-home buyers in the mix, nonwarrantable units are also capturing the attention of those looking for a primary residence, noted Jay Voorhees, founder and CEO of JVM Lending. The company originates loans in several states across the Sunbelt.
"We get inquiries constantly, far more often than we did maybe five to 10 years ago, asking us if we can finance such and such condo because it's not warrantable," Voorhees said.
While they may eliminate a number of buyers and lenders needing to work within the limits of a conforming loan, sales of nonwarrantable units, which tend to be lower priced than comparable homes backed by a GSE, can offer affordably priced opportunities for a different set of buyers.
"What we've discovered over the last three to four years is that there are more options now for these nonwarrantable condos than there were years ago," he added, in reference to lenders and available offerings.
That interest carries over to the
Although real estate investors are typically savvy about non-QM terms and processes, buyers looking for a primary or secondary residence are sometimes taken aback by unpleasant surprises surrounding a nonwarrantable-unit origination. The discovery of a unit's status as such sometimes occurs after the borrower has already gone through some of the underwriting and then has to start the lending process again.
Among the owner-occupied units that Björklund helps finance, many sold to clients outside his home state, nearly all are purchased by buyers initially unaware that traditional conventional financing methods might not work for their transaction.
While the list price of a unit in a nonwarrantable property can prove to be enticing, the sale will carry with it higher mortgage rates and higher down payments, which the borrower might not be able to afford.
"The closing costs with these nonwarrantable condos tend to be a little bit more just because there's more involved with the detailing and underwriting and document gathering," Björklund added.
"It's such a special-use mortgage product that you need to really make sure you overcommunicate and educate these clients and the Realtors," he said.
What makes a condo nonwarrantable?
While opportunities exist for lenders, a substantial increase in nonwarrantable condo sales is something the home finance community shouldn't get excited about, CAI says. A rise in their numbers can put long-term salability within some communities in jeopardy and stymie efforts to create a sustainable supply of affordable units in the future.
Instead, the organization underscores the need to address underlying rules behind how so many properties became unwarrantable in the first place.
While the top reasons may vary by market, financial and insurance requirements that are impractical for some building owners to meet lie at the heart of nonwarrantability.
The level of master insurance coverage could be unavailable for the property or market or only offered at an exorbitant cost, Bauman said. At the same time, GSE guidelines call for insurance to cover actual replacement values, which isn't an option for some buildings constructed decades ago.
"An insurance carrier is not going to provide coverage for actual replacement value," she said. "It's like providing coverage for a 1970 Chevy Citation, requiring that you have insurance that'll get you a 2025 new car."
To maintain eligibility for secondary loan sales to the GSEs, regulators also introduced higher reserve-funding levels after the Surfside disaster on individual properties that owners had trouble reaching.
"It's only been four years, so to build that reserve fund to a place where it is the right fund for that building takes time," Bauman added.
"These requirements are looking at some of these specific reserves and insurance that are just impossible to reach. It doesn't mean the building is unsafe. It doesn't mean that the building is financially unstable," she said.
Due to its appeal as a vacation destination, Florida also has many complexes with an unacceptable ratio of rental versus owner-occupied units, another common reason properties become unwarrantable, Bjorklund said.
While proving burdensome to buyers, nonwarrantability presents as much of a challenge for owners needing to sell their units. A common question Björklund hears from potential buyers is if they will be able to find interested parties when it comes time to move.
"You absolutely will be able to sell it later. The tricky part [could be] the financing now and how it will be in five years," he said.
It's also possible for a property to change status to GSE-eligible, and CAI is actively working with state lawmakers as well as federal regulators to come up with such solutions.
In the end, those efforts can produce a stable, dependable condo market that benefits HOAs, buyers and sellers alike, Bauman said.
"The condominium buildings might be fine if they continue to have investors and cash buyers, but at the end of the day, is that what's best for the American people? I don't think so," she said.
