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Surfside tragedy makes condo buying challenging nationwide

Real estate agents, condo associations and mortgage brokers say the new rules from Fannie Mae and Freddie Mac are having a chilling effect on the market

Gabrielle Smychynsky, a first-time home buyer, walks with her boyfriend, Wes White, and their two dogs in Myrtle Beach, S.C., on July 13. (Madeline Gray for The Washington Post)
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First-time home buyer Gabrielle Smychynsky had started packing in anticipation of moving into a townhouse in Myrtle Beach, S.C., excited to have a contract accepted after getting outbid on three homes.

Then she received a phone call the day before settlement, telling her the financing had fallen through. The 24-year-old teacher was devastated.

“I had saved up all this money,” Smychynsky said. “It was something I was looking forward to, and it felt like it was all crashing down.”

Record-breaking settlements for victims and their relatives have failed to provide closure a year after the Surfside, Fla. condo building collapsed. (Video: Luis Velarde/The Washington Post)

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Under new rules instituted by Fannie Mae and Freddie Mac in the wake of the collapse of Champlain Towers South condominium in Surfside, Fla., last year, condo boards or property managers are required to answer a 12-question form about the structural integrity of the building and the financial health of the association for the transaction to proceed.

Because her two-bedroom, two-and-a-half-bathroom townhouse was deeded as a condo, Smychynsky had to follow the rules even though they were originally intended for multistory buildings.

Real estate agents, condo associations and mortgage brokers say the questionnaire is having a chilling effect on the condo market across the country and making it even harder for first-time buyers like Smychynsky or those on fixed incomes who are already up against overheated housing prices and more expensive mortgage rates.

“Seniors, first-time home buyers, those who are able to own a home because condominiums are often more affordable housing options, they are going to lose out,” said Dawn Bauman, senior vice president of government and public affairs at Community Associations Institute.

Fannie Mae said it has not experienced a drop-off in its business. “We’ve seen no significant impact overall related to our temporary policies,” a Fannie Mae spokesperson wrote in an email. “These measures help protect borrowers from physically unsafe or financially unstable projects.”

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Buildings that don’t meet the standards are added to a list of buildings ineligible for loans backed by Fannie Mae.

While that list is not public, Orest Tomaselli, president of project review at CondoTek, a company that reviews condo documentation for lenders, says it included more than 900 condo buildings within 60 days. It has since grown to more than 1,000 properties.

“That list is the worst list you can be on if you are a condominium property,” Tomaselli said.

A Fannie Mae spokesperson wrote in an email: “Fannie Mae has long required scrutiny of project reserves on condo loans delivered to us. … There are a number of factors that would make a specific condo property eligible or ineligible for mortgage financing.”

However, some board members and property management companies say the questions are vague or require a level of expertise that is beyond them.

For example, Question 3 asks if the condo board is aware of any deficiency in the structure of the building. Critics say this question is better asked of a structural engineer than a volunteer board member.

As a follow-up to Question 4 about outstanding zoning violations or codes, Question 5 asks: “Is it anticipated the project will, in the future, have such violations?” — a question critics say is impossible to answer.

Because they fear liability, associations are refusing to fill out the form.

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In Smychynsky’s case, neither the property management company, First Service Residential, nor the homeowners association would fill out the questionnaire. First Service Residential did not respond when asked for comment.

“A lot of these HOAs, they’re not signing the documents so now you have an incomplete condo questionnaire and the loan can’t close,” said Hans A. Neugebauer, the real estate agent who represented Smychynsky.

Smychynsky was not the only one frustrated by the new requirements.

The seller “was emailing the HOA begging them to do the questionnaire because she had to pay a bunch of medical bills and needed to sell the house,” Smychynsky said.

After much back-and-forth communication with the underwriter, Tim Diedrich, senior loan officer at Motto Mortgage, found a workaround.

“The underwriter says if you can get me six months’ worth of HOA meeting minutes we’ll review those,” Diedrich said. “If we don’t see anything that looks like it’s a structural issue or something like that we’ll consider approving it.”

Smychynsky closed a week after her initial settlement date. Asked if he had run into this problem with other loans, Diedrich said, “Absolutely.” At the moment he is working with a registered dietitian who is trying to buy her first home, but the homeowners association is refusing to fill out the questionnaire.

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The problem is widespread, according to Ken Fears, a senior policy representative for banks, lending and housing finance for the National Association of Realtors.

“It was initially suggested to us that this change would only be a challenge in Florida, but we are seeing it in markets across the country — urban, rural, coastal and central,” he said. “What’s already been a tough market for underserved communities has been made even worse. In a worst-case scenario, it could create an open door for investors to take over the market or push some homeowners into distress because they can’t sell when they need to.”

It’s not just real estate agents who are concerned. The Mortgage Bankers Association has been hearing from big, medium and small lenders, said Dan Fichtler, associate vice president of housing finance policy at MBA.

And Hanna Pitz, a senior policy specialist at MBA, said the new requirements could make it harder to get condo loans.

“We saw in previous years when FHA added some more requirements for their condominium lending that share of the market correspondingly decreased, she said.

Tomaselli is sympathetic to the associations that are struggling to adhere to the new policies but says they are needed.

“The reality is in 13 years of doing this type of work we’ve seen many, many, many developments that have massive problems that the unit ownership within the building didn’t even know how pervasive and extensive the problems were,” Tomaselli said. “This flushes that all out.”

Even those who have problems with the new requirements agree their intention is sound. “We all want safe, stable buildings," Bauman said. “We all want this to work.”

CAI, MBA and NAR have written letters to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, asking for a pause in the implementation of the rules. MBA’s letter offers suggestions on how to reword each of the questions so that Fannie Mae and Freddie Mac can obtain the information they are seeking without unduly burdening the condo associations.

An FHFA spokesperson said that the agency is working with Fannie Mae and Freddie Mac to review the rules and is soliciting feedback.

Smychynsky and her boyfriend are now living in the townhouse.

“We have exactly what we wanted. Our neighbors are great. It’s a great community,” she said.

But the experience has left its scars.

“I don’t want to move again,” she said. “I don’t want to buy a house again. It’s too scary. All that money I had saved, they were kind of playing with my money, my emotions.”

correction

An earlier version of this story said that buildings that don’t meet the standards are added to a list of buildings ineligible for loans backed by Fannie Mae or Freddie Mac. Freddie Mac does not compile such a list, only Fannie Mae does.

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