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Secret Mortgage Blacklist Leaves Homeowners with Unsellable Condos
A secret mortgage “blacklist” is leaving homeowners throughout the country struggling to sell their condominiums. The list, maintained by Fannie Mae, includes condo associations that the mortgage finance giant deems as having inadequate property insurance or requiring critical building repairs. The consequences can be severe, making it significantly harder for potential buyers to secure financing.
In recent years, the number of condominium developments failing to meet Fannie Mae’s lending criteria increased to over 5,000 properties, up from just a few hundred in 2021. The shift came in response to the Surfside condo collapse in Florida, in which 98 people were killed. Since the collapse, stricter safety regulations and a growing insurance crisis have made it increasingly difficult for condo associations to secure coverage meeting Fannie Mae’s standards. Therefore, Florida now has more than 1,400 blacklisted developments.
Insurance costs have soared nationwide, compounding the issue, particularly in states prone to natural disasters, such as Florida, California, Colorado, Hawaii, and Texas. In many cases, condo associations are forced to accept insurance policies with exclusions or higher deductibles that make their properties ineligible for Fannie Mae-backed loans.
Fannie Mae and its counterpart Freddie Mac do not issue loans but purchase roughly half of the nation’s home loans to package and resell to investors, guaranteeing payments. Loans meeting their underwriting criteria, known as conforming loans, can be less expensive and require lower down payments than bespoke mortgages. Properties that fail to qualify face a major disadvantage in the real estate market.
While Fannie Mae provides an online tool for lenders to check a property’s eligibility, the blacklist itself is not publicly available. Many homeowners and real estate professionals only learn about a property’s inclusion on the list in the midst of a sale, resulting in failed transactions and significant financial losses.
The Role of Insurance
Fannie Mae and Freddie Mac require a minimum level of insurance. The firms issued new guidelines last year that have prompted lenders to take a stricter line on insurance requirements, according to lenders, real estate agents, and insurers.
Fannie Mae and Freddie Mac require a specific level of insurance coverage for home loans they are willing to buy to ensure the debt can be repaid should the property be damaged or destroyed. However, rising claims from natural disasters have led insurers to raise premiums, limit coverage, and impose higher deductibles, often beyond what Fannie Mae and Freddie Mac permit. One particularly contentious issue is that many insurers now only cover the depreciated value of damaged roofs rather than full replacement costs, a practice neither Fannie Mae nor Freddie Mac accept.
As a result, many condominium associations are struggling to secure insurance policies that meet such strict standards. Some are opting for reduced coverage, even if it means their properties become ineligible for Fannie Mae-backed loans, which makes it difficult for homeowners to sell their units.
A Los Angeles condominium complex was recently added to Fannie Mae’s blacklist for failing to meet the required standards. Despite not suffering recent damage, its homeowners’ association was quoted an annual premium of $2.6 million, 10 times its previous rate, for a policy meeting Fannie Mae’s criteria. Accepting would have more than doubled monthly homeowner fees. The blacklisting also occurred over the complex’s pooled insurance policy covering multiple properties, which Fannie Mae also does not allow.
The insurance industry is pushing the Federal Housing Finance Agency to relax Fannie Mae and Freddie Mac’s strict requirements, arguing that current policies are destabilizing the housing market and trapping homeowners in unsellable properties. Fannie Mae and Freddie Mac defend their requirements, saying they are essential for long-term financial stability and that weakening standards could leave homeowners vulnerable if a disaster strikes.
Given the lack of public access to Fannie Mae’s blacklist, homeowners, buyers, and real estate professionals should take proactive steps to determine whether a property is eligible for financing before entering into a transaction.
Herold Law, P.A. can assess your legal options. Call 908-679-5011 or contact us online to schedule an initial consultation. We have offices in New Jersey, New York, Florida, and Pennsylvania.
