Fannie Mae and Freddie Mac are now requiring lenders to pay even closer attention to a condo building’s finances.

This shouldn’t really be a shock for anyone who’s been paying attention to the condo market, especially in Florida. Effective last Monday, Fannie Mae retired its limited review process, and Freddie Mac ended its streamlined review process, which allowed lenders to approve conventional mortgages without a deep dive into a condo associations’ finances.

The long and short of it?

 

All conventional mortgage applications have to go through the full review process, unless they qualify for a waiver.

Fannie Mae also clarified its policy that allows lenders to use a reserve study to show that a building has sufficient reserves when it’s not budgeting for replacement reserves under Fannie’s requirements. Now lenders have to verify that the budget is using the highest recommended reserve allocations, and lenders can no longer use a baseline funding method that allows the reserve cash balance to approach zero.

So if you’re a buyer, seller, mortgage broker or real estate agent involved in a condo sale, the financial health of that condo association has a bigger effect on whether the deal pans out — that is, as long as a mortgage is involved. Lenders are also requiring insurance coverage and maintenance history.

That could mean another wrinkle in the purchasing process, likely one that adds time and could kill certain deals. Even though condo associations across the state are now being forced to get into financial shape, through the state-mandated funding of their reserves and safety and maintenance requirements, not all have.

“Communities that consistently invest in reserves, keep financial records current and plan will generally be in a stronger position when lenders evaluate the property,” said Robert Smith, a regional president at FirstService Residential.

Smith said Fannie and Freddie’s recent changes will result in condo deals becoming more detailed than before. It will be more difficult to finance purchases in older buildings and complexes that are still addressing reserve funding or big capital projects — think roofs, concrete restoration, installing hurricane windows and modernizing elevators. But it may also motivate condo owners and their boards to get moving on funding their reserves and tackling these capital improvements.

The associations that have been proactive will benefit, and that premium could be baked into the pricing.

Eventually, this should be a good thing. It is being implemented as buyers are increasingly priced out of the single-family home market across South Florida, which means it could limit those same buyers’ options in the condo market. But ask anyone who owns a financed condo in an older building with little financial stability. Wouldn’t they have preferred a little more scrutiny?

“The biggest difference is that buyers now need to evaluate the financial health of the condominium association just as carefully as they evaluate the home itself,” Smith said.