ORANGE COUNTY, Calif. – Jeff and Melaina Brill will long remember February 2023 as the month they went through a complicated pregnancy and a hellish home sale at the same time.
In the end, their new baby girl and their escrow both turned out fine.
Their daughter, Aurora, was delivered by C-section on March 2. Three and a half hours later, they got a text saying the two-bedroom condo the family of five had outgrown had been sold as well.
“(The sale) seemed like a shoo-in, and we were on the edge of celebrating when we started getting messages from the Realtor that there’s some kind of problem with the building,” Jeff Brill said. “My wife was already concerned about the pregnancy situation. Now we’re adding to the stress of ‘do we sell this place or not?’”
Unbeknownst to the Brills, their real estate agent or their homeowners’ association, mortgage giant Fannie Mae had put their building, the Harbor Lofts condominiums in downtown Anaheim, California, on a secret list of condos ineligible for Fannie-backed mortgages. They didn’t find out about it until their buyers applied for a loan near the end of a three-week escrow.
All over America, condo buyers and sellers have been getting similar surprises.
In response to the Surfside, Fla., condo collapse that killed 98 people and caused more than $1 billion in property losses, conventional lending giants Fannie Mae and Freddie Mac drafted new lending standards last year to weed out condos and co-ops with deferred maintenance, structural safety issues or shaky finances.
As a result, a growing number of complexes wound up on what some call Fannie Mae’s “blacklist.”
Many, like the Harbor Lofts, got put on the list because of construction defect litigation between the owners and the builder. In February, residents of 6,102 condos at Laguna Woods Village learned their homes were added to the list because their HOA’s insurance is insufficient.
But it’s hard to know that a building is on the list, let alone why it got put there. Fannie’s list is confidential, available only to lenders and servicers.
As a result, condo buyers and owners are often unaware they can’t get cheaper conventional financing until they apply for a loan – sometimes while in the middle of a sale.
“It’s a crapshoot,” said Orest Tomaselli, project review president for CondoTek, a Philadelphia-based company that provides documents and services to condo and co-op lenders. “The only way for you to find out if a (condo) project is on that list is if you apply for a mortgage and the lender runs that project to see if it’s unavailable. And only then, typically, is a buyer informed.”
The number of buildings on Fannie’s list is relatively small, but it’s growing fast. In the 16 months since the new standards took effect, Fannie Mae’s list of ineligible condos and co-ops grew from about 900 nationwide to more than 1,400, Tomaselli said. Of those, just over 60 are in Southern California.
But once a property lands on that list, buyers or owners seeking to refinance can’t get cheap, conventional mortgages. For a median-priced Southern California condo, that means paying 2.5 percentage points more in interest and $769 more per month in mortgage payments.
That affects the pool of buyers, limiting sales to those who are paying cash or willing to get higher-cost financing.
“You’re essentially blacklisting the (condo) community, and that affects values,” said David Gaylord, a mortgage broker with Arbor Financial in Laguna Niguel.
There are 132,000 to 157,000 condo and co-op complexes in the U.S., according to the Community Associations Institute.
While Freddie Mac doesn’t maintain a list of ineligible condos or co-ops, both Freddie and Fannie adopted “temporary” guidelines in January and February 2022 making such communities ineligible for conventional loans if they have significant deferred maintenance or lack the reserves or insurance for future repairs.
Both Fannie and Freddie required HOAs to complete a new questionnaire to determine if complexes are in serious disrepair or lack the financial wherewithal for renovations, Tomaselli said.
Lenders who sell their mortgages to Fannie and Freddie also are expected to take a deeper dive into condo or co-op documents, reviewing six months of HOA meeting minutes and examining inspection and engineering reports from the past five years.
Soon after the new guidelines took effect, the Mortgage Bankers Association and the National Association of Realtors called for a pause in their implementation, saying Fannie and Freddie need to clarify the requirements and overhaul the HOA questionnaire.
Fannie and Freddie defended the new guidelines, saying they’re meant to protect lenders and borrowers, adding that just 1% of the nation’s condos and co-ops are on Fannie’s list. “These measures help protect borrowers from physically unsafe or financially unstable (condo or co-op) projects,” a spokesperson said in an email.
Like Fannie Mae, the Federal Housing Administration (FHA) keeps a list of condos and co-ops ineligible for FHA mortgages. But the FHA makes its list public, even providing an online search engine to look up the eligibility status of condo complexes.
A Fannie Mae spokesperson declined to explain why its list is private.
But real estate agents, mortgage brokers and industry insiders say it should be public.
“Shouldn’t homebuyers, shouldn’t Realtors, shouldn’t HOAs themselves know if somehow they wound up on this bad list?” asked Kelly Richardson of Pasadena, an HOA attorney and a contributing writer for the Southern California News Group. “It reminds me of double secret probation from that famous old comedy (“Animal House”). … We’re not going to tell you that you’re on that status, but we’re also not going to tell you why you’re on that status.”
Fannie Mae said a complex’s status can change when sufficient documentation is provided to confirm eligibility issues have been resolved. But because the list is secret, HOAs have a hard time finding out why they’re on the list or how to get off it, industry officials said.
It’s easy for a local loan officer to input the wrong data or check the wrong box, they said.
Making the list public provides “greater transparency,” said Ken Fears, NAR’s director of conventional finance and valuation policy. “We think it would be a real benefit to the industry – not just servicers and lenders but also real estate agents or the HOAs,” Fears said. “If there’s erroneous information about the property on this registry, there’s no way for an HOA or agent to know about it or to contest it, and that’s very problematic.”
Finding out mid-escrow you can’t get conventional financing could put a condo purchase out of reach for some buyers because they might need a bigger down payment or because they don’t meet stricter credit requirements, said Los Angeles mortgage broker Joshua Wolfson, owner of Executive Funding Solutions. “If you haven’t met any of those other requirements, you may not be able to buy that property,” Wolfson said. “You may fall out of escrow.”
Some HOA attorneys advise their clients not to fill out the new questionnaires, saying there’s too much risk, Richardson said.
HOA board members and community managers aren’t engineers or architects, yet they’re asked to answer questions as if they were, industry officials said.
“What if you say everything’s great, but it’s not? Or what if you say there is a structural deficiency, and they don’t get their loans, but you were wrong?” asked Natalie Stewart, president of FHA Review, a Huntington Beach firm that helps condo developments qualify for FHA and Veterans Affairs funding. “You’re putting a lot of pressure on somebody who doesn’t have the resources to answer the question correctly.”
At the Mariposa in Plum Canyon condos in Santa Clarita, word has gotten around about being on Fannie’s list, Re/Max agent Chad Hartman. The complex of attached townhomes has been on the list for at least a year because of its construction defect lawsuit against the builder.
“My guess would be it was a pretty painful process the first few deals when people found out. (But) it’s been known since,” Hartman said. “The local agents, we’ve known about this for a long time.”
But nobody knew about the list at the Harbor Lofts – until the Brills’ escrow almost fell through and saddled the couple with an extra mortgage they couldn’t afford.
Expecting their third child, the Brills decided to sell their 1,859-square-foot condo after they looked around and asked, “Where do we put the nursery?” They already were sharing their condo with their two sons, Eli, 4, and Levi, 2.
“We needed to move somewhere that had more bedrooms,” Jeff Brill said.
The couple bought a four-bedroom, two-story house in Anaheim Hills and moved last December. Then they put the condo up for sale. Jeff Brill, who works at Blizzard Entertainment, calculated he could pay overlapping mortgages for just two or three months.
Despite a slow housing market, the Brills’ condo sold within a week at $100 over their asking price. The buyers were eager to move in, offering to close in just three weeks.
“We had really good buyers who loved the property,” said Cindy Uhrik, the Brills’ agent. “About two weeks into the escrow, we found out they couldn’t get their loan.” The reason shocked her since the Harbor Lofts didn’t show up on the FHA’s ineligible list, and “FHA is more stringent than Fannie Mae and Freddie Mac.”
The escrow got extended one week. Then another. The Brills considered selling their new house to avoid paying two mortgages for a fourth month.
“Sleepless nights? For sure for my wife,” Jeff Brill said. “What does it look like if we have to box the stuff up again and tell the kids this isn’t our home?”
The buyers, meanwhile, went from lender to lender, finally getting approved for a loan, but at a higher cost. The Brills coughed up $15,000 to cover the buyers’ added finance costs.
Then, it was on to the next challenge: Melaina’s labor, scheduled for March 2. The C-section took a little longer than expected. But in the end, little Aurora was delivered, beautiful and healthy.
Meanwhile, Uhrik had a delivery of her own. She was determined to close escrow before Aurora was born. Instead, both deliveries occurred simultaneously. The Brills were in the recovery room feeding their newborn when Jeff Brill’s phone made a little pop.
“Escrow’s closed,” the text read. “Everything’s complete.”
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