Why there are a growing number of unsellable condos in Colorado 

The Town Homes at Meadow Hills homeowners association dots the i’s and crosses the t’s when it comes to keeping the community shipshape. 

“Things like insurance, landscaping, snow removal — everything to keep our property up. We don’t do deferred maintenance. If we have an issue, we address it right away,” said board president Randy Garlington, who owns one of the 46 townhouses adjacent to the Meadow Hills Golf Course in Aurora.

So, it was a bit concerning when he recently learned that a decision the board must make in May could impact owners planning to sell their units. A growing number of condo properties nationwide are ending up on a mortgage blacklist because they don’t meet requirements for Fannie Mae and Freddie Mac, which set the standard for conventional loans and . 

One requirement is that the community’s property insurance deductible can be no more than 5%. Any higher and condo owners won’t be able to sell their units to buyers who are using conventional loans, the most common loan available. Buyers can still pay cash, or use more expensive alternatives, like seller financing or FHA and VA loans.

But a higher deductible was a negotiating tool Garlington had hoped to use before the property’s insurance renews in May. The premium unexpectedly tripled last year, forcing the Meadow Hills HOA to raise monthly condo fees by more than 60% — an extra $200 a month to $525. He hoped to avoid that this year and wanted to ask insurance brokers, “What if we take on some of the higher risk?”

He doesn’t know if Meadow Hills is on Fannie Mae’s so-called blacklist. The list is only accessible by mortgage lenders. Condo owners and buyers often don’t find out until a buyer is rejected for a loan, though there could be other reasons for that. Fannie Mae officials did not respond to questions.

“Now that you’ve said that, we’ve had a couple of units that have had a tough time selling,” Garlington said. “I don’t know why other than anecdotally. One has complained a little bit because our HOA dues are as high as they are. But our HOA dues are as high as they are because of our insurance.”

Colorado ranked third for ineligible properties

A recent Wall Street Journal story called it a “.” With 210 properties, Colorado ranked third in the U.S. for states with the most condo projects blacklisted by Fannie Mae as of February, according to Boston law firm Allcock & Marcus.

Florida led the way with 1,398 properties while California was second, at 695. There were 5,175 total. But local news stories began popping up two years ago, with on the list in April 2023 and growing that same year to by October.

Most local lenders seemed to roll their eyes while talking about it. One called the Wall Street Journal story “sensationalized,” because the list has been around for years. It’s a list of non-warrantable properties, which doesn’t quite roll off the tongue.

The blacklist moniker has increased awareness in a market where many condo owners, potential buyers and even real estate agents, HOAs and homeowners insurance agents are unaware of the issue.

Sunny Banka, a longtime Realtor in the Aurora and Denver area, knew about it. She said that her team has run into the blacklist. But they don’t find out until an offer is made. 

“We don’t know until you get into the documents and sometimes it’s so buried that you don’t realize it’s a problem,” Banka said. Her daughter and business partner just had a property under contract that was rejected by the lender because it was non-warrantable. She steered the buyer to another condo.

“Buyers can’t buy them. There’s a lot of them out there that are dealing with this very issue,” Banka said. “The prices of condos might be very low and they are very affordable, but the HOA fees and taxes are outrageous. I have a two-bedroom, two-bath condo listed for $212,000 with a garage. It needs work. It needs appliances. There’s pink carpet. The HOA fee is $514 a month plus there’s a recreational fee that’s $35.”

The list became a focus after 98 people were killed in the in south Florida in 2021. The tragedy was blamed on the failure of the building’s aging structural columns, which were compromised over time. The collapse is still , but Fannie Mae and Freddie Mac as a result. 

To qualify for conventional loans now, a condo complex must have completed critical deferred maintenance, have a cash reserve of at least 10% of the HOA’s annual budget, and maintain insurance to cover 100% replacement cost. A policy offering just actual cash value for insured items, like a roof, would make the property for a conventional loan. There’s also the . 

The list helps lenders understand which properties are in or out of compliance for conventional loans — and that’s critical for the mortgage industry, said Dawn McDonald, a regional account executive at Towne Mortgage, a wholesale lender that works with mortgage brokers and then resells the loans to larger companies like Chase, AmeriSave and Fannie Mae.

“We might only be lending to one condo unit, but we’re lending on the stability of the entire HOA community,” McDonald said. “That’s why they (Fannie Mae) warrant the project and not just the unit. When there’s deferred maintenance, they could cause safety and structural issues. It could cause issues with the HOA’s financial stability. Those are some of the whys behind how condos are getting on the list.”

She also reviews the list with some skepticism. She does her own research since some properties may have resolved their issues.

“Some make the list as approved and some make it as not reviewed at all. So we as the lenders have to review them for acceptability,” McDonald said. “And then some make it as , which means that Fannie has said that (the condo properties) don’t meet their requirements. And a lot of them are getting on that list because of the deductible issue.”

Nicole Rueth, founder of mortgage lender The Rueth Team in Denver, said the majority of loans for condos she’s seeing now have challenges meeting the Fannie Mae requirements. She is seeing deductibles at 8% and 10%, which automatically puts a property on the list.

“I had a conversation with one HOA management company and I said, ‘You know, this is going to be a problem for every buyer that wants to come in and for every seller who wants to sell to a conventional buyer.’ And she said, ‘Well, the buyers just need to find a different lender because the only lender that has a problem with this is Fannie Mae and Freddie Mac.’ I had to laugh because I’m like, you don’t understand how big that statement just was. That’s a problem. They don’t understand,” Rueth said. “It’s an attempt to offset increased property taxes, increased cost of maintenance, increased cost of labor, increased costs of everything.”

“Condominiums are supposed to be the entry point to access home ownership (and) now it’s regretfully created such a burden on that first-time homebuyer.”

— Nicole Rueth, Denver mortgage lender

Owners can still sell their condo or townhome. But their buyers must find alternative financing, such as all cash or a hard loan from a private lender. FHA loans from the Federal Housing Authority and VA loans for veterans are also OK but can be less flexible and more expensive. 

“Condominiums are supposed to be the entry point to access home ownership for those that struggle with affordability. It used to be that they would appreciate and they would give you equity,” Rueth said. “And now it’s regretfully created such a burden on that first-time homebuyer.”

Why condos are in this pickle

The number of properties on the list started increasing more rapidly after 2022, the year annual inflation peaked and home prices set records. When home values rise, the cost for insurers to replace them goes way up, too. The impact? Skyrocketing homeowners insurance premiums, which in turn raised HOA fees. Predictably, some HOAs tried to avoid the increase by upping insurance deductibles or deferring maintenance. 

“I’ve been in the business for 30, 35 years and we’ve always had to look closely at condominiums,” said Jeffrey Beattie, president and CEO of Alliance Mortgage Group in Centennial. “The insurance piece has never really been a problem. But within the last year or so, it’s become a huge problem in Colorado because of the cost of insurance and what the homeowner associations are doing to keep those premiums down.”

While the blacklist is accessible to the mortgage industry, anyone can scan real estate listings on Zillow to see which condos have finance terms that are cash only. Another sign is when the complex has a lot of rentals, which Fannie frowns on, too.  

High homeowners insurance premiums in the past two years are often credited to climate disasters and damage from wildfires and hailstorms that have pummeled Colorado homes. Premiums rose nearly 60% between 2018 and 2023, according to the Rocky Mountain Insurance Association. But there’s also inflation, large lawsuit settlements and the higher cost to rebuild housing.

Aurora-based Service Plus Community Management, which manages about 45 HOAs mostly in the Denver and Aurora area, has an insurance broker speak to its HOA boards every year. They’ve seen insurance premiums “that have doubled or tripled or more in the last two years,” said Todd Larson, who started Service Plus eight years ago.

Several of his HOAs are on Fannie Mae’s ineligible list for reasons that include deductibles that are too high, too few owner-occupied units, years of deferred maintenance and low reserve funds, like one with $10,000 “and they really need a million,” he said. Some already had those problems when he started the company in 2017.

It’s a challenge for HOAs to keep up with new regulations, he added. “Fannie and Freddie have really been a moving target. Since the Champlain Towers collapsed, they’ve really changed how they do things. And as community managers we don’t really get a lot of those updates,” he said. “I don’t even know that (insurance) brokers know.”

Even engaged owners willing to do the research and investigate all options are coming up short. Garlington, the president of the Meadow Hills HOA, said that after last year’s insurance rate hike, they tossed ideas around, including what if every owner got their own insurance? 

“We did not find it was less expensive,” he said, not to mention the “brain damage” for the board if it had to manage 46 policies. 

What is being done

Condo communities have unique challenges, said Carole Walker, RMIA’s executive director. 

“The liability associated with condominiums has really pushed a lot of the standard commercial insurers out,” Walker said. “What you’ve seen as the surplus lines market, which is the higher risk market, has moved into the space, that does impact costs because those policies are many times higher and they have higher deductibles.”

☀️ READ MORE

Nonrenewals are fueling Colorado’s growing homeowners insurance crisis

In Colorado, homeowners’ premiums are up nearly 60% in five years. But the state is also dealing with insurers dropping coverage or leaving the state altogether.

Read more

Walker owns a condo and is on the HOA board. She recommends that associations shop around and look for experienced insurance brokers who know the ins and outs of the loan requirements. Her HOA has its own insurance committee.

The Community Associations Institute, which represents HOAs and self-governing associations, is working with the Mortgage Bankers Association and Community Home Lenders to urge changes, “especially to the insurance deductible requirement and the replacement value coverage for roofs for condominium buildings,” said Dawn Bauman, CAI’s chief strategy officer.

A is underway by the Colorado Division of Insurance to look at the availability and affordability of insurance for owners associations and come up with recommendations, including looking at “captive insurers” that are owned and controlled by condo owners. The study will be released Jan. 1.

Launching in mid April, unless there are further delays, Colorado’s Fair Access to Insurance Requirements, aka , is expected to offer policies to homeowners who have been turned down by at least three insurers. Prices are expected to be higher than standard insurance.

Other proposals moving through the state legislature could help homeowners save on premiums includes House Bill 1302, a reinsurance option that essentially provides insurance for insurers on catastrophic disasters so insurance companies can reduce their risk. There’s also , a bill supported by the state Division of Insurance that would require insurers to share discounts for mitigation efforts that homeowners take to protect their homes, and allow policyholders to appeal their wildfire risk scores. 

“There needs to be different solutions for this condo market because it’s starting to become untenable,” said Walker, who regularly talks to state lawmakers and insurance officials. “What are the different insurance gaps? … Could (we) create a cooperative of insurance for condominiums, especially up in the mountains where all these buildings are owned by the same people? We’re trying to look for, to use the cliché, some out of the box solution.”