Real Estate News

Number of Mass. condo developments on Fannie Mae blacklist triples

Agency won’t back loans for unsuspecting buyers and sellers of these properties. Rising master insurance premiums amid extreme weather is one of the factors at play.

By Jim Morrison -- Boston.com Correspondent

June 26, 2024

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In one year, the Fannie Mae secret blacklist of condo developments nearly doubled, and part of that surge can be attributed to the rising cost of insurance premiums.

In Massachusetts alone, the number of blacklisted properties more than tripled.

There were 74 Massachusetts developments on the blacklist on May 29, up 222 percent from 23 in May 2023. Other New England states also saw an increase:

In May 2023, the blacklist contained 1,770 US developments totaling 313,840 units. Last May, the list had nearly doubled to 3,349 developments, totaling 588,466 units ineligible for the popular mortgage program aimed at lower-income buyers.

Homeowner’s associations and condo boards still aren’t being told they are on the list. Most find out only when unit owners list their properties and the deals fall through because Fannie Mae, short for the Federal National Mortgage Association, excludes them from their low-cost loans. Others are flocking to websites like CondoBlacklist.com. In December 2023, Fannie Mae promised to make its list public by late 2024.

Jim Toscano owns Property Management of Andover. He checked to see whether any of the properties he manages were on the blacklist in February and was relieved to find they weren’t. He was surprised when the Globe reached out to him earlier this month and told him a development he manages, Indian Ridge Condominiums in Tewksbury, had been blacklisted in April.

When a unit there was being sold in May, the buyer tried to use a Fannie Mae-eligible loan and got denied because of the excessive deductible. When Toscano was told, he reached out to his insurance company.

“We have one of the lowest deductibles you can have, which is $10,000 per home for water-related damages,” he said. “We have almost 300 homes in 23 buildings on 48 acres. I’m going to have a broken pipe or an ice dam affect 300 homes? In 2015, everyone had ice dams, we had about 17 ice dam problems, but even that didn’t affect every unit.”

So he asked his insurance company what could be done. His agent asked the carrier, and the carrier wrote an addendum to Indian Ridge’s property insurance policy that included language to the effect that in the event there is such a claim, it will lower the amount of deductible to meet Fannie Mae’s requirement. He said the unit was then sold.

“If I come across this in the future with any other property we manage, what will happen is any time an underwriter or an agent calls about insurance, they’ll get that addendum directly from the agency and that will solve the problem,” he said. “Because they don’t tell you how to get off the list.”

In a September 2023 email to the Globe, a Fannie Mae spokesperson wrote, “We encourage HOAs and lenders to provide sufficient documentation to Fannie Mae when eligibility issues have been resolved.”

It’s tough to address an issue when you don’t even know there is one.

Since the beginning of 2024, there has been a surge in the number of properties added to the list for having too large a deductible on the association’s master property insurance policy. The maximum allowable deductible for all required property insurance perils is 5 percent of the master property insurance coverage amount.

Did Fannie Mae ramp up its oversight on insurance, or did rising premiums send more properties over the threshold?

In May 2023, there weren’t any New England developments on the list for insurance issues. That changed last May: In Massachusetts, 43.2 percent of the condo developments were blacklisted for having an “excessive deductible” or an “actual cash value” issue with the insurance. It was 31 percent in Connecticut, 37.5 percent in New Hampshire, and 30.8 percent in Rhode Island. Maine and Vermont did not have any on the list for this reason.

It’s an alarming concept with premiums on the rise inmany locales because of climate change.

The average premium for a typical Massachusetts homeowner in 2020 was $1,699, according to the Massachusetts Division of Insurance. In 2022, the latest year for which data are available, it was $1,818, a 7 percent increase. Compare that with Florida, where premiums are expected to climb that much this year alone, according to a 2023 report from Insurify, a digital insurance agency.

With property insurance premiums skyrocketing across the country, especially after the deadly Champlain Tower collapse in Surfside, Fla., in 2021, condo associations have struggled to pay premiums without substantially raising association fees. To control costs, many have opted to increase their deductibles.

A Fannie Mae spokesperson said in an email that the government-sponsored enterprise has not changed the deductible requirement nor increased enforcement of that requirement.

And the agency has no intention of making the list itself public.

Instead, “Fannie Mae will implement a web-based condo/co-op status lookup tool in Q3 of 2024, which will allow HOAs to search for their own project to determine if Fannie Mae is aware of any physical, financial, or operational conditions with the project that do not meet our Selling Guide requirements.”

Many in the condominium law and management community said the master insurance rule is unfair, especially in light of soaring insurance premiums.

Marc S. Einhorn is a partner with the law firm Marcus, Errico, Emmer and Brooks and president of the New England chapter of the Community Associations Institute. He said the insurance deductible requirement is at odds with Fannie Mae’s stated goal of promoting housing affordability and what it is actually doing is making master policies more expensive, if not unattainable.

When so many condominium associations had ice dam claims in the frigid, snowbound winter of 2015, the losses were staggering for insurance companies, who in turn increased rates substantially. Einhorn said that event birthed a new idea.

“One idea to stop the loss history from being so bad was that associations increased the per-unit deductible,” he said. “It makes perfect sense because the HO6 policies — the individual homeowner policies that a condo unit owner can buy — they cover the master insurance deductible.”

Stephanie Kim, personal insurance supervisor of Acrisure New England, said one problem with that solution is that not every owner gets an HO6 policy, and not every policy is written to cover the master policy deductible, though the industry considers that a “best practice.”

“You really can’t generalize with condominium policies,” Kim said. They’re all different and it can be challenging. We’re constantly pairing our clients’ personal condo coverage with the master policy, so hopefully we’re eliminating any gaps.”

Condominiums were conceived as an affordable alternative to owning a single-family home, but they’re much less affordable than they once were.

The median sale price of a single-family home in Massachusetts in May was $636,000, according to data from The Warren Group. The median sale price of a condo was $550,000. And with condo fees, increasing insurance costs, and barriers to low-cost Fannie Mae programs, units are become less affordable.

Jake Marcus, a partner at law firm Allcock Marcus, said rising costs are burdening condominium associations and by extension, their owners. Larger developments can spread costs over more owners, but smaller developments in the 10-20 unit or fewer range are feeling financially squeezed.

“What we’re seeing is not only are condo owners paying their mortgage, they also paying the monthly fees,” he said. “There is also a lot construction defect litigation. Now there are attorneys’ fees required to get off the blacklist, higher insurance premiums, and having to have a robust reserve fund at your association. Then there can be special assessments on top of the annual budget, where costs are also rising. It’s not everyone, but in a lot of cases, we see condo owners who are basically saying, ‘This is becoming unaffordable and I need to find something else.’”

Marcus said it isn’t common, yet, but condominium deconversion — dissolving the condominium association, selling the entire building to a developer and dispersing the proceeds to the individual unit owners — is happening at a time when we can least afford to lose any housing. A recent Zillow report found Greater Boston needs an additional 154,985 housing units to meet current needs.

“Termination is becoming a real thing with condominiums,” he said. “A developer who can afford it, sees value in land, and repurposes it. I see it as an opportunity to either bring the building out of a rough place or establish a new kind of property there. That’s definitely something we’re seeing more and more of the possibility for developers buying and creating something new.”

“When the number of developments from Massachusetts and the New England states is more than doubling in a year, it shows you this is a nationwide issue,” Marcus said. “I don’t think we’re going to solve that today. But I think there’s clear signs it’s not slowing down.”

Jim Morrison can be reached at [email protected]. Follow him on X @jimmorrison617.