Condo "blacklist" brings surprises for owners

Homeowners across the U.S. are grappling with rising insurance costs and ineligibility for Fannie Mae-backed loans, with thousands of condominiums now blacklisted due to safety and environmental concerns.

In a story published this week, The Wall Street Journal noted 5,175 condo properties across the country on the list, meaning any loans collateralized by their units would be ineligible. 

While such a list has existed for several years, the number of properties multiplied following the collapse of a development in Surfside, Florida, which killed 98 people in 2021 and resulted in the introduction of new safety laws. Prior to the incident, the list contained only a few hundred names, the article said. 

The changes led the government-sponsored enterprises to revisit condo lending guidelines, and today over 1,400 blacklisted properties are located in Florida. Following are California, Colorado, Hawaii and Texas, all states at risk of climate-related disasters and whose residents are dealing with rising insurance costs. 

While the full list is not publicly available, law firms representing the condominium industry maintain a searchable database for property managers and unit owners to determine if their properties fail to meet Fannie Mae standards. 

Fannie Mae pushed back on the classification of its list, noting it existed to protect borrowers from unsafe projects. Fannie Mae said it also offers online tools meant to assist lenders in finding out if their condo loans will conform to its guidelines.  

While fellow GSE Freddie Mac has similar regulations regarding conforming loan eligibility, it said it does not maintain a similar list automatically disqualifying units on properties for secondary market sales. 

Mortgage borrowers are required to hold homeowners insurance coverage in order to qualify for loans backed by the enterprises. Updates to GSE guidelines published last year, though, led lenders to apply greater scrutiny to ensure they complied with insurance rules. 

Making the situation more difficult to the point of unaffordability for many is the rapid acceleration of insurance prices in recent years after natural disasters, with a majority of homeowners now expecting further increases to come. Premiums rose to an average of $2,290 last year, ICE Mortgage Technology reported. 

Even for properties not subject to the blacklist, buyers of condo units are likely to take a financial hit from multiple directions due to surging individual premiums as well as condo association fee increases needed to cover insurance costs imposed on full developments. 

Additionally, some insurance providers are trying to raise deductibles to levels that would result in the loans becoming nonconforming. At the same time, condo associations are attempting to reduce their rates by cutting back on coverage, which would have a similar effect. 

When a loan or property is at risk of falling into nonconforming status, sellers have struggled to offload their units, requiring them to rely on private secondary market buyers with less stringent standards or all-cash buyers. In some instances, they were forced to reduce asking prices in order to find an eligible buyer. 

Florida condo residents, in particular, are facing ongoing cost pressures from insurance hikes plus a lack of available providers, both contributing to reduced property values. Owners in California will also see higher premiums following destabilization of insurance coverage following recent wildfires, the state said.