Mortgage Rules Toughen Up for Condos in Vacation Hot Spots

Mortgage financing giants Fannie Mae and Freddie Mac have tightened rules on buildings that offer too many short-term rentals in vacation locales, drawing objections from the real estate industry. The new rules could make it tougher for some buyers to get a mortgage on condos in resort areas, and many real estate professionals aren’t happy about it, The Wall Street Journal reports.

Fannie Mae’s new rules, which took effect Dec. 7, 2020, says the government-sponsored enterprise would no longer back loans in high-rent vacation spots. Freddie Mac echoed that decision, with similar rules to take effect in February.

That could make entire buildings ineligible for mortgage financing even though just a few units are rented out on a short-term basis, real estate pros argue. 

“We’re concerned that access to credit could be limited for whole projects or condo buildings, which could affect not just second-home buyers but some primary home buyers across the country,” Ken Fears, a senior policy adviser at the National Association of REALTORS®, told The Wall Street Journal.

Fannie Mae said the new rules are focused on banning “condotel” buildings that are organized centrally through management, rental, and realty companies. They said the new rules are not focused on individuals who may offer their units up for short-term lease. 

“We have specifically told lenders that seeing individual units advertised by their owners on home-sharing platforms does not, by itself, mean the project is a condotel,” a Fannie Mae spokesperson told The Journal.

But the real estate industry says the new rules need greater clarity on what qualifies and what doesn’t. The rules are prompting some lenders to be timid around second-home condo loans. They fear the GSEs may decide to no longer back the loan on certain condos and then force them to buy back the mortgages, keeping them in their portfolios. The condo projects or homeowners associations themselves have not offered input on the process and there is no way to redress an erroneous review for eligibility by a lender.

“Until there is more clarity from the agencies, all mortgage bankers are shutting off the valve on condo loans right now,” Rob Henger, director of mortgage banking at FirstBank Mortgage, told The Wall Street Journal.

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