At the intersection of Fannie Mae and Freddie Mac lending standards and California’s balcony law is a big question: How high will condominium HOA fees and special assessments go?
First, let’s explore the so-called California balcony law or Senate Bill 326. The law was enacted in 2019, after six people died in 2015 when a Berkeley apartment balcony gave way and fell 50 feet to the ground below.
Condo communities throughout California had until Jan. 1, 2025 to complete inspections required under the bill.
Specifically, communities with three or more units with wooden balconies, decks, stairs and walkways 6 feet or more above ground now require a deeper inspection, and a subsequent one every nine years. Communities also must plan to and take care of any repairs forthwith.
We’re talking dry rot, termites and deferred maintenance.
“More and more buildings are getting older, 40, 50-year mark,” said Laurie Poole, co-managing partner at the law firm Adams-Stirling. “I’m concerned about those associations having the funds to cover common maintenance.”
“Are they prepared financially?” she wondered.
In addition to inspections, HOAs are required to conduct reserve studies every three years to determine how much the association needs to set aside for future maintenance of their balconies.
So, if there are significant repairs without funds in the bank, then increased monthly HOA fees or special assessments are possible.
“We do 50 balcony inspections per month and 80% need some repair,” said Alex Del Toro, president of The Termite Guy in Santa Ana.
The cost is between $10,000 and $25,000 per balcony, according to Del Toro.
“The largest special assessment I’m aware of, which isn’t necessarily the largest, is $175,000 per unit,” said Jeff Beaumont, an attorney at Beaumont Tashjian in Agoura Hills.
What about enforcement?
“Many communities are not compliant. There is no regulatory agency overseeing (SB 326),” Beaumont said. “Though there is legal and community exposure and marketability (challenges).”
A condo community remains ineligible for Freddie Mac lending consideration until the required repairs and/or inspection report have been completed and documented, according to its website.
Also see: California leaves the safety of aging high-rises largely in owners’ hands
Fannie Mae did not respond to my query as to whether it would automatically put a California condo association on its unavailable (to fund) list if the HOA hasn’t complied with the California balcony law.
How about basic monthly HOA charges?
“The lowest is $300 per month and the highest is $2,800 per month for HOA,” said Erik Rivera, president at Manhattan Pacific Management, of the 80 HOAs the company manages.
To be clear, amenities matter as well. Higher HOA charges might be a function of more amenities, not necessarily just increased charges to cover maintenance, reserves or insurance.
Two weeks ago, I visited a Laguna Niguel condo open house. I was aghast when the Realtor told me the HOA fee was $1,030 per month. It was a basic condo. The association did have a pool though. I did not inquire about any potential special assessments.
Now let’s focus on the intersection with Fannie Mae and Freddie Mac. And certainly, there is some overlap between the balcony law standards and requirements of the mortgage giants.
Fannie Mae and Freddie Mac tightened up their lending standards for financing condos after the Champlain Towers collapsed in 2021 in Surfside, Florida. That horrifying disaster, blamed on years of deferred maintenance at the 12-tower complex, claimed 98 lives.
The biggest concern by the mortgage-backers seems to be such deferred maintenance, which can threaten the health and safety of condo occupants.
Countless condo buyers use Fannie Mac or Freddie Mac because of their low interest rate mortgages. Condos or HOA units must be “warrantable” in order to secure conventional financing. If the condo doesn’t pass the sniff test, buyers must find non-warrantable financing, and that financing rate is typically 1.25% higher than conventional financing.
An example: A buyer with a warrantable condo can get 6.5% on a 30-year fixed Fannie Mae loan. If the HOA community doesn’t pass the rigorous conditions set by the agency, a buyer would have to find a non-warrantable loan at roughly 7.75%. Non-warrantable loans also require a down payment of at least 20%, whereas Fannie Mae and Freddie Mac-backed loans can go as low as 3% down.
So, why would the agencies not bless the HOA with warrantability? It’s likely the community is in need of critical repairs, or it’s underinsured and financial shortfalls mean there’s not enough money in its reserves.
Fannie Mae keeps a list of condos unavailable for its financing. Industry sources have told me there are 4,500 condo associations across the nation that are on the unavailable list. And that list is growing by 200-400 HOAs per month. There are 370,000 community associations in the U.S., and 150,000 condo associations, according to Dawn Bauman, chief strategy officer at the Community Association Institute.
Freddie Mac does not keep a list. Rather, a lender uses a Freddie Mac tool called Project Assessment Request. The goal is to have data input on a community come back as “Project Certified.” That means it’s warrantable by Freddie Mac.
A source told me there is very little difference between the Fannie and Freddie standards. None the less, your lender should always check both mortgage giants for warrantability. If, for example, the HOA comes up on Fannie Mae’s unavailable list, it might come be project certified by Freddie Mac. Both agencies’ mortgage pricing is virtually the same.
HOA fire insurance seems to be the key reason many condo associations are not warrantable. For example, Fannie Mae wants 100% replacement coverage. Many associations either can’t afford the cost of such a policy or they can’t buy that much coverage.
“Insurance costs are skyrocketing like I’ve never seen before in my 26 years of practicing,” said Beaumont. “Prices have gone up 100, 200, 300 and 400 percent.”
My advice for you if you are considering any condominium:
—Check to see if the project is warrantable by Fannie Mae or Freddie Mac.
—Review the community’s latest financial statement and budget. The seller can get these for you. If you don’t understand how to decipher these documents, get your smartest accounting friend to examine them for you.
—Read and review the board meeting minutes for the last six months to see if any trouble is brewing.
—Ask by written request of the seller if he or she is aware of any increases coming to the HOA fee or special assessments.
—Walk the complex and knock on some doors to see and learn of any HOA problems.
Freddie Mac rate news
The 30-year fixed rate averaged 6.89%, 6 basis points lower than last week. The 15-year fixed rate averaged 6.05%, 7 basis points lower than last week.
The Mortgage Bankers Association reported a 2.2% mortgage application increase compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $134 less than this week’s payment of $5,306.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75%, a 15-year conventional at 5.5%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 5.875% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.625% and a jumbo 30-year fixed at 6.5%.
Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.99% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.