Fannie Mae and Freddie Mac are changing some rules related to insurance that could cut costs for condo owners. However, there's a catch.
The Federal Housing Finance Agency announced updates to home insurance rules on Wednesday. FHFA Director William Pulte said they'd simplify the scheme for condominium owners and associations.
"Lower insurance costs and mortgage rates shrink the monthly payment of a new mortgage, giving new homebuyers confidence that they can afford the American dream," Pulte said.
Experts say the changes could make it easier for hundreds of condominium buildings, and possibly tens of thousands of units, to obtain insurance. But it also carries certain requirements they should be wary of.
Realtor.com® senior economist Joel Berner says the laws take aim at ancillary condominium costs that have risen in recent years.
"If these provisions help cut monthly insurance costs and/or expand insurance coverage to more condos, it should be a boost to demand in a segment of the market that badly needs it," Berner adds.
What the rule changes mean
FHFA says the new rules could reduce insurance and other costs for condominium owners. By allowing them to use cheaper coverage on an actual cash value basis, and simplifying rules around deductibles, it hopes more will qualify for mortgages.
Actual cash value (ACV) basis considers what the roof is worth today, after depreciation. That differs from the replacement cost value (RCV) protection, which covers the cost of replacing the roof with a new one.
RCV coverage is "ridiculously expensive and hard to find," FHFA said.
FHFA is also paring back some of the documentation and legal requirements of a 2024 rule involving property insurance requirements.
FHFA says the rules come from industry feedback. Condo projects complain of rising premiums and limited availability of insurance in some areas. But FHFA also says it must protect against property loss, which could be exacerbated by underfunded complexes.
South Carolina Sen. Tim Scott, chairman of the Senate Banking Committee, praised the move.
"Lower costs mean lower monthly payments and more families able to achieve homeownership, especially in rural and condo markets," the Republican said in a post on X.
Mortgage Bankers Association CEO Bob Broeksmit says change is due for the "overly rigid requirements." He estimates tens of thousands of units could be eligible for lower-cost GSE financing.
"Expanding the number of properties that can access conventional financing is a direct benefit to prospective buyers and an important step in the ongoing effort to improve housing affordability," Broeksmit says.
Homeowners and property insurance, HOA dues, and other costs have risen. Some of these condo owners actually pay a higher share of home value each month than single-family-home owners do, Berner says.
"Because of these monthly expenses for condo owners on top of principal and interest, what should be a more affordable option than single-family homes turns into a real affordability challenge," Berner says.
What condo owners need to know
Condo maintenance has come under tighter scrutiny after the 2021 condominium collapse in Surfside, FL, that killed 98 people. It triggered a series of changes to condominium laws in that state, which led to skyrocketing HOA fees.
Despite legislative relief, condo owners in Florida still routinely face high fees. Some of the financing requirements of this bill could make things even more difficult.
In Florida and other states, lawmakers have scrambled to ensure condo projects are putting aside money for maintenance. But Dawn Bauman, CEO of the Community Associations Institute, worries about the increased reserve requirements for condo associations that the rules create.
Starting in January 2027, FHFA requires condo groups to allocate 15% of their annual budgeted income assessment to capital expenditures and deferred maintenance. That's up from 10% now. But that might not be enough time for condo associations to build the reserves they need.
Bauman understands the policy after Surfside, but it could be yet another sticker shock for condo owners as they catch up.
Since Surfside, "critical repairs and maintenance reserves have been on everyone's mind," Bauman says. "Yes, it's a great idea, but it takes time, and there's already a financial demand on each of these homeowners, planning for and handling critical repairs."
Also, the rule changes strengthen review requirements by eliminating faster "limited" reviews in favor of a full review, which taxes all sides involved, Bauman says. The change affects about 40% of all reviews currently conducted.
