Understanding Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) that play a crucial role in the mortgage market. They buy mortgages from lenders, either holding them in their portfolios or packaging them into mortgage-backed securities (MBS) that can be sold. This process provides liquidity to the originating lenders, ensuring a steady flow of funds for new loans. In 2023, Fannie Mae and Freddie Mac supported around 70% of all conventional mortgage loans.
Increased Scrutiny Post-Surfside Collapse
In the wake of the Surfside Towers condominium collapse in Miami in June 2021, Fannie Mae and Freddie Mac have tightened their lending requirements. They now impose more stringent criteria focusing on deferred maintenance, engineering surveys, reserve studies, reserve funding, insurance, delinquencies, litigation, and special assessments. Properties that fail to meet these standards are designated as unavailable for lending. This means borrowers may face higher down payments, increased mortgage rates, and stricter terms and conditions due to the higher risk perceived by lenders.
Impact on Property Values
The ability to secure a mortgage loan significantly affects property values. As of January 1, 2025, over 4,500 associations have been designated as unavailable for lending, a number that has surged, in recent years. This designation can make it challenging for potential buyers to obtain financing, thereby impacting the marketability and value of these properties.
Future Trends and Recommendations
With the increasing frequency of natural disasters such as hurricanes, flash floods, rising water levels, and wildfires, the mortgage industry anticipates even more rigorous scrutiny in the future. To avoid being classified as unavailable for lending, associations should:
- Update reserve studies every three years with an on-site inspection.
- Maintain adequate reserve funding.
- Stay current on major maintenance and replacement projects.
- Manage collections effectively.
- Ensure insurance policies stipulate current replacement costs.
By adhering to these practices, associations can improve their chances of meeting lending criteria and maintaining property values.