Government-sponsored mortgage enterprises Fannie Mae and Freddie Mac are rolling out new condo lending requirements that will increase scrutiny of condominium buildings during the mortgage approval process. The changes, effective Aug. 3, eliminate streamlined review procedures for certain condo projects and instead require comprehensive assessments of condo associations’ finances, reserve funding, insurance coverage and building maintenance conditions before mortgages can be sold to the enterprises.
Industry experts anticipate the stricter standards will lengthen the mortgage approval timeline and potentially result in loan denials for buildings failing to meet new requirements. According to the Community Associations Institute, approximately 40% of mortgaged condo purchases previously utilized streamlined reviews and will now require full assessments. While some lenders may retain loans in their own portfolios rather than selling to Fannie or Freddie, borrowers would likely face higher down payments or interest rates as compensation for the additional risk.
The policy shift follows the partial collapse of Champlain Towers South in Surfside, Florida, on June 24, 2021, which killed 98 people. A subsequent investigation revealed the 40-year-old building had design and construction flaws coupled with decades of deterioration. This disaster prompted tightened underwriting standards both at state and federal levels, with Fannie and Freddie initially implementing temporary restrictions on mortgages for properties with significant deferred maintenance or critical repairs.
Additionally, a separate requirement taking effect in January will require condo associations to maintain reserve funds at 15% of annual budgets for major repairs, up from the current 10%. Industry groups have petitioned for a one-year delay to allow associations time to understand and comply with the changes. Trade associations argue the modifications will create delays and complications for buyers, though once a building passes full review, subsequent mortgages generally won’t require reassessment.
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