Fannie and Freddie Now Want 15 Percent Reserves, and It Is Reshaping Which Miami Condos Can Be Financed

The agencies retired the easy review paths and raised the reserve floor from 10 percent to 15 percent of budgeted assessments. In a county with roughly 12 months of condo supply, that decides which buildings a conventional buyer can even bid on.

Fannie Mae and Freddie Mac tightened their condo financing rules effective Monday, August 3, and the effects are now showing up at the closing table. CNBC covered the change when it landed on August 1. The Real Deal reported on September 13 on how the new rules are affecting deals, under a headline that opened with the phrase “Like pulling teeth.” I have not seen the deal files behind that reporting, so here are the mechanics, which are not in dispute.

What actually changed

• Fannie Mae retired PERS. Its mandatory Project Eligibility Review Service requirement for new Florida condo projects is gone, and so is its limited review process, which had let lenders approve conventional mortgages without a deep dive into an association's finances.
• Freddie Mac retired streamlined review. All conventional mortgages now go through full review unless they qualify for a waiver. Projects of 10 units or fewer fall under the waiver qualification.
• The reserve floor moved to 15 percent. Reserves now have to meet a minimum of 15 percent of the annual budgeted income assessment, up from 10 percent.
• January 4 is the date. Under full review, lenders have to comply with this requirement for loan applications beginning January 4.

Florida law was already pushing associations the same direction. Condo buildings three stories or higher and 30 years or older, or 25 years depending on the municipality and proximity to the coast, are required to fully fund their reserves, a result of the condo safety laws passed after the Surfside collapse. An older Miami-Dade association that has been deferring reserve funding now fails a state test and an agency test at the same time.

Stack that on inventory. Miami-Dade has been carrying roughly 12 months of condo supply against 4.8 months for single-family homes. Twelve months is already a buyer's market. Add a rule that can push a whole building outside conventional eligibility and the split between a financeable condo and a practically cash-only condo becomes the most important fact in any listing.

My read

I now ask about reserves before I ask about the view. Before you write an offer in a building from the 1970s or 1980s, get the budget, the reserve study and two years of financials, and have your lender confirm in writing that the project clears full review. On the sell side, ask your association today for the reserve figure as a percentage of budgeted assessments. If it is under 15 percent, your buyer pool has narrowed to cash and portfolio lenders, and you should price for that on day one rather than discover it three weeks into escrow. What I cannot tell you is how many South Florida deals have actually collapsed over this, because that reporting sits behind one outlet and I have not verified it. The rules themselves are in force.