Key facts
- Condominiums are a key source of affordable homeownership for about one-third of Americans.
- Recent changes by Fannie Mae and Freddie Mac have eliminated a limited review option for condo loans and increased reserve requirements.
- An estimated 60% to 80% of current condominium originations utilized the limited review process.
- Lenders report increased borrowing costs, reduced participation in mortgage origination, and longer loan closing times due to the policy changes.
- Industry groups are seeking more flexibility and balanced alternatives to the new underwriting requirements.
Federal policymakers are being urged to re-evaluate recent changes to condominium project approval policies implemented by Fannie Mae and Freddie Mac, which lenders argue are hindering affordability and increasing mortgage costs. While some adjustments, like increased flexibility for condo insurance policies, were seen as positive, the elimination of a "limited review" loan option and stricter reserve requirements have created significant operational burdens.
According to feedback from the Community Home Lenders of America (CHLA), an estimated 60% to 80% of current condominium originations previously used the limited review process. Its removal means a majority of these transactions now require more extensive underwriting, regardless of the actual risk presented by the borrower or the project. This has led to increased borrowing costs, reduced lender participation in originating condo loans, and longer closing times.
In July, CHLA, the Community Associations Institute (CAI), and the National Association of Mortgage Brokers jointly wrote to the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac to voice these concerns and seek greater flexibility. They suggest alternatives such as a limited review option for loans at 80% loan-to-value (LTV) for primary residence purchases, expanded exemptions for refinance transactions, and standardized project-review certifications to reduce duplication among lenders.
Additionally, lenders and condo associations anticipate disruption from a year-end requirement to increase Homeowners Association (HOA) reserve levels. They are requesting a one-year delay for this standard, coupled with a collaborative review to refine guidance and develop streamlined pathways for lower-risk transactions. The ongoing high mortgage rates underscore the need to balance sound underwriting with the availability and affordability of condominium homeownership.