An Action Plan For Condo Affordability

In recent weeks, President Trump has increasingly focused on “affordability” as a top priority.  

When it comes to housing, that means addressing homeownership affordability challenges, which are significant by historical standards.  According to a recent Report by the National Association of Realtors, “The share of first-time home buyers dropped to a record low of 21%, while the typical age of first-time buyers climbed to an all-time high of 40 years.”

What can be done about this?  We should focus on homeownership options that are the most affordable – starting with condominiums.  According to 2024 Zillow data, condominiums in the 25 largest U.S. metropolitan areas are on average 54% more affordable than single-family homes.

Unfortunately, affordability is not translating into demand.  In July, Redfin reported that condo sales are down 12% year-over-year – a drop of more than 3 times the drop for single-family homes.   

What are the reasons for this?  One is excessive mortgage fees on Fannie Mae and Freddie Mac condo loans.  U.S. Federal Housing Director Bill Pulte should be commended for his recent pledge to review GSE LLPAs (mortgage pricing fee add-ons) and eliminate unnecessary fees. 

Currently, Fannie and Freddie charge an add-on fee (LLPA) of 75 basis points for each condo loan.  This undermines the competitive affordability advantage condos have over site-built homes.  This condo LLPA fee should be eliminated.

Another factor: despite the fact that FHA, Fannie Mae and Freddie Mac combined are responsible for more than half of all new home purchase loans, many condo projects are not even eligible for a loan from these key loan programs.  Worse, too often, home buyers make home purchase offers on condos without knowing the underlying project is not eligible for such loans.

Let’s start with the Federal Housing Administration (FHA).  FHA is the primary mortgage financing source for entry level first-time homebuyers, helping qualified borrowers obtain a home purchase mortgage loan even though they may have low down payment capabilities or modest credit blemishes.

However, FHA loans for condos have plummeted over the last 25 years, falling from over 100,000 loans in 2001 to around 15,000 a year currently.  Moreover, despite the fact that condos comprise around 10% of all existing home sales over the last four years (per NAR data], only around 2% of FHA loans are for condos.

A big reason for this is that many projects that are eligible for loans with Fannie Mae or Freddie Mac are not eligible for FHA loans.  This is due to a number of factors, including a somewhat cumbersome FHA condo project approval process and financial disincentives for lenders to undertake this approval process for just a single mortgage loan.

The Community Home Lenders of America (CHLA) and the Community Associations Institute (CAI) – trade groups representing mortgage lenders and condo associations – recently joined together to suggest a simple but effective proposal to address this problem.  Noting the President’s call for actions to address a housing emergency, CHLA and CAI called on FHA permit loans for any condo project that already has Fannie Mae or Freddie Mac approval.

As noted, Fannie and Freddie are doing a better job on project approvals.  One reason for this is the GSEs’ “limited review approval process” – which provides for a streamlined process, while retaining essential requirements to ensure the safety and soundness of condo loans.  In recent years, there has been speculation that the GSEs would eliminate or scale back this flexible condo approval process.  That would be a mistake.

Fannie and Freddie have also made real progress in the last few years in implementing reforms to address concerns about the quality of condo association management, the aging of older buildings, and the level of capital reserves individual associations have.  This makes sense especially given the Surfside disaster.  

However, CHLA believes these policies could benefit from further refinement so that the policies are more aligned with real risk.  A new garden apartment in a bedroom community in Oklahoma should not be underwritten to the same standards as an aging oceanfront  high rise building. 

As this reform process continues, Fannie and Freddie should also recognize that mortgage lenders are neither trained nor resourced to be held responsible for ensuring condominium projects meet structural and eligibility standards.  Instead, condo quality control requirements should be verified through the condo associations themselves or with the option to retain GSE approved  third party assessments.

Finally, Fannie and Freddie should be balanced and flexible when it comes to insurance requirements.  Homeowner insurance costs have skyrocketed in recent years, and in certain markets like Florida, insurance has become more difficult to obtain.    So, Fannie and Freddie should set their insurance requirements to permit insurance deductibles up to 10%, to keep homeowner costs down.

This is just one of the recommendations developed by CHLA through their Condo Working Group.

Other recommendations for Fannie and Freddie include exploring other tools to mitigate portfolio risk without ending up with prohibitively expensive premiums on homeowners and fine tuning policies to distinguish between critical repairs that directly affect structural soundness, safety, and habitability and other repairs that are more cosmetic or non-structural.

Condominiums must continue to play a critical role in helping Americans achieve the dream of homeownership.  Let’s all roll up our sleeves to make this happen.

Kelly Welch, is the executive strategy and compliance advisor at Equity Resources, Inc. and a member of the CHLA Condo Working Group.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.