Whether it's empty nesters looking to downsize or people taking their first step into the world of owning real estate, condominiums, or condos, offer an alternative to purchasing a house or continuing to pay rent. Those who find their dream condo or have a deal to sell theirs might be in for a bit of a shock when the deal falls apart.
A secret so-called "blacklist" of government-sponsored enterprises (GSEs) has led to challenges in securing mortgages required for the buying of condos. Buyers being unable to buy means that sellers have difficulty finding qualified purchasers. The problem? Inadequate insurance or condos in need of repair. The solution? Good question.
Fannie and Freddie
The federal government established two private mortgage companies to operate as secondary mortgage lenders. Fannie Mae, formerly the Federal National Mortgage Association, was created in 1938 as part of President Franklin D. Roosevelt's New Deal. It securitizes mortgage loans as mortgage-backed securities (MBS) and buys mortgages from large banks.
Originally called the Federal Home Loan Mortgage Corporation, Freddie Mac buys and pools mortgages from smaller banks and credit unions. The GSE then sells these MBSs to private investors. It was created in 1970 to make it easier for potential homeowners to be approved for a mortgage.
Both Fannie Mae and Freddie Mac are under the conservatorship of the federal government. This was a decision by the Federal Housing Finance Agency (FHFA) after the 2008 financial crisis.
While Fannie Mae and Freddie Mac sell their MBSs like stock shares, they pay the investors back if one of their homeowners fails to keep up with their mortgage commitment. As a result, Fannie Mae and Freddie Mac have the authority to set regulations in their quest to provide buyers with mortgage access.
Having this power means that both GSEs can deny mortgages for various reasons. In the wake of the Surfside condo collapse, it appears they've been doing so more frequently.
Fallout From the Collapse
In 2021, one of the towers of a condo complex in Surfside, Florida, collapsed. Almost 100 people died, and the remainder of the building was later demolished. The 40-year-old structure had fallen into disrepair and was scheduled for $15 million in remedial work, which had not begun by the time of the collapse.
For Fannie Mae or Freddie Mac to approve a mortgage for a condo, both the unit and the building it's in must be considered safe and in good repair. The GSEs will refuse to back a mortgage if they think the risk is too great. This protects both buyers and the GSE.
The GSEs also have insurance requirements that must be met. Condos located in places under threat of severe weather, such as those near a body of water, have seen insurance rates skyrocket in the face of increased flooding, damaging weather, and wildfires. Condo associations, which are charged with purchasing insurance, have turned to less expensive policies with limitations.
While the intent is to help mitigate costs for the condo association members, it presents an issue if Fannie Mae and Freddie Mac determine that the coverage is inadequate and won't back the mortgage. This has created what a Wall Street Journal report termed a "blacklist" of over 5,000 properties that Fannie Mae refuses to back a mortgage for due to disrepair or inadequate insurance.
Protecting the Buyer?
Fannie Mae denies the existence of a blacklist. It stated that its regulations and the buildings on its list considered questionable are online tools to keep borrowers from falling into financially unstable or physically unsafe projects.
Whether what Fannie Mae has is an actual blacklist or not, it's affecting the industry. Florida passed the Condo Safety Act in 2024, giving more power to condo boards and stricter safety rules. This has resulted in a drop in average value per unit, a surge in available units over 30 years old, and some larger condominium lenders abandoning the Florida market entirely.
Related Resources
- Condominiums and Cooperatives (FindLaw's Real Estate Law)
- Tips for Buying a Condo or a Co-Op (FindLaw's Owning a Home)
- Qualifying for a Mortgage (FindLaw's Mortgage and Equity Loan Laws)
