The Fannie Mae (FNMA) Ineligible Condominium list is growing faster than we can keep track of. Projects are added literally every day on a nationwide basis and the effect it has on financing these projects are hurting potential home buyers. Once added to the FNMA ineligible list, the majority of lenders who normally finance these condos will now exclude them. Even if a lender does not sell their loans to FNMA, many of them use their guidelines for qualifying a borrower, as well as qualifying a condo project. If the project is on the CPM list (condo project manager) it is ineligible to finance.

Many will ask why the list is growing so fast? The answer in California is easy. It’s a combination of a condo project no longer being insured to the insurance company’s replacement cost estimate (RCE), or Fannie Mae’s RCE, which can be much higher than the insurance company’s RCE, and two specific laws, SB800 and SB326.

Its been in the news and on the internet. Home and auto insurance coverage is getting harder to come by in California and other “disaster-prone regions”. Many companies, including Kemper, State Farm, and Allstate, have exited the CA market claiming many reasons, including wild fires, floods, and extreme weather, as well as historic increases in construction costs outpacing inflation. Condo projects are finding that their insurance company will no longer renew them at their existing coverage, on top of charging them much more for the lesser coverage offered. Insurance must cover 100% of the insurable replacement cost of the project improvements, including the individual units in the project. Once it no longer does, it becomes Fannie Mae “ineligible” or “non-warrantable”, meaning Fannie Mae will no longer purchase a loan in the community from a third party originator.

Two specific laws in California are also impacting the financing of condominiums in California. SB800, also called the “California’s Right to Repair Act”, has been around since 2003. SB-800 sets standards for new construction, allowing builders the right to repair defects as a means of avoiding litigation, and provides builders with certain legal defenses. The problem is Fannie Mae considers this “pending” litigation, and a condo project whose HOA is a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project are ineligible for sale to Fannie Mae. So if a condo project files a notice to the builder for warranty repair under SB800, it becomes Fannie Mae ineligible.

The new law on the block in California is SB-326. SB-326, also known as the California Balcony Inspection Law, requires regular inspections of balconies, walkways, and decks on multi-family housing and condo projects in California. The bill went into effect in 2020 and essentially protects property owners from building defects, and helps keep residents safe from hazards due to construction flaws. All condo projects must be inspected by a licensed engineer, and all repairs must be completed (if required) by January 1, 2025. The reports can range from $10,000 for smaller communities, to upwards of $100,000 for a larger community. Law firm Adams-Sterling, a CA attorney who represents upwards of 1000 HOA’s, estimates that less than 20% of all condo projects have not had an inspection. The issue? If your inspection requires the condo project to complete repairs, it is now Fannie Mae ineligible until the repairs are done. If they repairs result in a one time special assessment to the homeowners, it is also Fannie Mae ineligible due to the special assessment. Both affect the financing, as most lenders will not lend until the repairs are completed and the special assessment is paid. On top of that, each homeowners share of the special assessment must be paid by the seller, if the property is sold.

Ultimately, SB-800 and SB-326 issues will be resolved and the condo project can become warrantable, or Fannie Mae eligible, again. The X-Factor is the insurance issue. Can that be fixed? As a lender who has done in excess of 600 loans on Fannie Mae ineligible condos, I never had to deal with the insurance issue until March of 2023. Now it represents 50% of my loan volume, and GROWING. The California Dept. of Insurance increased its FAIR Plan commercial coverage limits for condo projects to $20MIL per location, but the majority of condo projects in California have a higher replacement cost than $20MIL. Another option for condo projects is excess and surplus lines, or E&S, markets. Those are non-admitted insurers domiciled somewhere outside California, who have the freedom to adjust their rates without approval from the department of insurance. But these policies are expensive and the companies who do them are selective with what projects they will insure. The bottom line is that it appears there is no near term solution for the insurance issue in California, which will ultimately continue to add projects to the FNMA ineligible list.