Insurance Is Having A Growing Impact On Condo Affordability

On Wednesday, Fannie Mae and Freddie Mac adopted extensive changes to their requirements for approvals of condominium projects that are eligible for their loan purchase.  The changes created more flexibility and affordability with respect to replacement cost and deductible requirements for condo insurance– but took a step backward by ending authority for what are called limited reviews.

Why is this issue important? There are an estimated 5.4 million owner-occupied condominium units in the United States, accounting for roughly 6.3% of all owner-occupied homes.  Condos are commonly significantly more affordable than site-built homes – and for many moderate-income homebuyers, the only option they can afford to achieve homeownership.  

This issue is also important because while insurance costs have surged over the past five years, nowhere has the impact been more pronounced—or more consequential – than in the condominium market.  Rising premiums are no longer just a homeowners’ association budget issue; they have become a financing barrier. Increasingly, otherwise sound condo projects are being deemed ineligible for conventional financing, shrinking options for creditworthy buyers.

With roughly 20% of US condominiums are located in Florida, the state dominates this discussion—and for good reason. The state has faced a steady drumbeat of natural disasters, driving insurer losses and premium increases. But this is not just a Florida problem. Insurance pressures are reshaping condominium affordability and mortgage access across the country.

So, what did Fannie and Freddie do? Two significant and positive changes to insurance requirements include relaxing replacement cost coverage requirements to accept cash value on roofs and changing the allowable deductible levels.  

These changes will improve condo mortgage loan availability and affordability.  They strike a better balance between guarding against risk related to natural disasters and insurance losses and mitigating some of the impact of recent insurance cost increases.  The result will be lower insurance costs for condo projects and owners and more potential homebuyers that qualify for a mortgage loan.

At the same time, lenders will have concerns about the elimination of the option to carry out a “limited review” of a condo association, now requiring a full review on every condominium project. A full review entails more documentation from the HOA, including a full budget review on every condominium project, and increased costs.  

Elimination of limited review authority will have a negative impact and will disproportionately impact smaller lenders that are not GSE seller-servicers, who must rely on loan aggregators.  So, the GSEs should explore ways to achieve their objectives in a less burdensome manner.

Lenders do appreciate, though, that Fannie and Freddie did raise the threshold for an exemption – from 4 to 10 unit projects. Welcome news for smaller condominium projects.  

Fannie and Freddie also substantially increased minimum reserve requirements, from 10% to 15% of the annual budgeted assessment income. While strengthening reserves can improve long-term financial stability for associations and help moderate special assessments for future repairs, they will result in higher HOA monthly dues, which will negatively impact affordability for some borrowers.  While this may be prudent for condos with heightened risk, it is arguably unnecessary for less complex projects.

Further refinement is still needed. One key area is the definition of “critical repairs.” One recommendation of the Community Home Lenders of America (CHLA) Condominium Working Group is the need for clearer, more consistent standards.  In some cases, relatively minor issues are being classified as critical, triggering unnecessary costs, delays, and uncertainty in the lending process.

Still, the process leading up to this week’s announcement was inclusive and productive – giving lenders and condo associations the opportunity to provide feedback and recommendations.  This makes for better policies.

And Fannie and Freddie have made condo financing a priority. In fact, significantly more condo projects have been approved by the GSEs than by FHA – leading CHLA earlier this year to call for FHA to adopt a policy of insuring qualified loans in condo projects approved by Fannie or Freddie (but not yet by FHA).

At a time when the age of the average first-time homebuyer has reached 40 years old, condominiums are more important than ever as a critical entry point to homeownership. 

Ensuring that insurance and underwriting standards are both sound and appropriately calibrated will be essential to preserving that pathway. In an already constrained housing market, maintaining access to condominium financing is not just important—it is an imperative.

Kelly Welch is a member of the CHLA Condominium Working Group and an Executive Strategy and Compliance Advisor with Equity Resources.
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.