Condominiums have historically been our most affordable site-built homeownership option. However, escalating insurance costs, concerns about the structural integrity of condos, and more stringent underwriting requirements threaten to undermine the advantages of this critical home purchase option.
Is there a way forward that addresses these new concerns about condos, but maintains the cost advantages that condos have that make them so affordable?
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The answer is yes. But it will take a balanced and concerted effort on the part of federal mortgage insurance programs (e.g., FHA, Fannie Mae, and Freddie Mac), increased scrutiny by mortgage lenders, and proactive steps by condo associations and their management and consultants.
First, the bad news.
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For example, I own a condo in Florida, which now requires buildings over three stories in height and older than 30 years to conduct regular structural integrity inspections every 10 years.
These developments have resulted in two profound changes. First insurance, maintenance, and repair costs have escalated for condo owners. Second, lenders are being stricter when underwriting condo loans.
Consider the impact of increasing condo homeownership costs and expenses. Condo Home Owners Associations (HOAs) have an annual budget and the costs in that budget for insurance, structural reviews and repairs are directly passed on to unit owners, which can be assessed in two ways.
The first is monthly HOA dues. Some dues have increased 100%. Mine have increased over 35% in the last 5 years. The second is one-time assessments to pay for the structural integrity review and if necessary to pay for repairs. I have paid three assessments on my unit in the last 5 years, all three between $4,000 and $9,000. One was based on hurricane damage, one on structural updates necessary, and the third on enhancements to the condominium that the owners voted to approve.
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These types of cost increases have made it more difficult to qualify for a mortgage loan to finance a condo.
Higher insurance costs and higher resulting HOA dues affects debt to income (DTI) calculations. In response, many HOAs have tried to reduce insurance costs, through higher deductibles or actual cash value policies instead of replacement cost policies.
Unfortunately, conventional financing typically requires lower deductibles and replacement cost coverage, restricting that approach to some extent.
In my opinion, federal mortgage programs should not set overly strict requirements regarding deductibles and extent of coverage, simply because they can. Achieving the right balance between these two objectives is tricky but is essential.
Ultimately, this will protect buyers. Prospective home buyers of condos see HOA dues in the listing for the condominium and base their affordability decision to buy a condo on these HOA dues without realizing these can change dramatically if there are hidden problems or costs.
The same is true with respect to concerns about the structural integrity of condominium buildings.
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While such concerns are legitimate, federal mortgage programs should make it a priority to develop fair, balanced, and transparent standards for condo associations and their managers with regard to their building's structural integrity. Standards that at the same time assuage their legitimate concerns about hidden problems or costs.
Who determines whether a condominium passes the structural integrity requirements for conventional financing? It is difficult for the mortgage lender, who has no formal training in building inspections or structural integrity reviews, to do this. If no structural integrity review has been completed recently, the lender must determine this with other means, sometimes using just HOA employee comments, meeting minutes or other arbitrary information. This is not an easy task.
Similarly, whether or not a condo is eligible for Fannie Mae or Freddie Mac or FHA financing is critical. Obtaining financing for a home purchase is on a tight timetable, so whether or not a project is eligible is critically important. And, if a project is not eligible, there should be clear standards and prompt consideration to obtain approval, for those projects that merit approval.
As a member of the Community Home Lenders of America (CHLA), I appreciate that CHLA has taken the lead on these condo issues over the last several years.
When Fannie Mae, Freddie Mac, and FHFA floated proposed changes that were arguably an over-reaction to Surfside, CHLA argued for more balanced policies that better target risk. Susequently, those proposals were appropriately scaled back.
CHLA also successfully pressed Freddie Mac to create a more transparent list of approved condo projects and has developed proposals to streamline FHA approval of projects, while maintaining basic underwriting protections.
Ultimately, we need a broad coalition of players — mortgage lenders and their associations, condo managers and their trade group (the Community Association Institute) and federal mortgage programs (FHA, VA, RHS, Fannie, and Freddie) — to focus on condo finance policies and to work together to develop solutions that balance affordability and building structural integrity.
It is in that spirit that I am writing – to call attention to the importance of condominiums to an affordable national homeownership environment and to spur debate about the best path forward.
