Florida seems to be in the news every day.
Maybe you had been tracking the latest of Florida Man (an amazing, but retired, twitter account), or are currently tracking the battle between Ron De Santis and Disney World. More likely, you have been hearing that all of New York has been moving to Miami, Palm Beach, or anywhere in the Sunshine State. It’s true- there’s been a 20% increase in that influx to Florida in the past five years, an addition of nearly 550,000 new Floridians to the tax rolls.
However, Florida is impacting our market in other ways. Specifically, new regulations are coming North due to the Surfside Building Collapse that took place nearly a year ago. Let’s talk about that, and how it may portend changes in the lending environment in general.
The Surfside Collapse
A refresher: Champlain Towers were constructed in 1981, two separate buildings- a North and South Tower. Both had been sinking since the 1990s. Inspectors gave grave warnings in 2018 of the state of the structure of the South Tower.
And so castles made of sand fall into the sea eventually.
In 2021, this building tragically collapsed, killing nearly one hundred people. In the aftermath, the major government-sponsored lenders Fannie Mae and Freddie Mac took a look at their underwriting practices.
What has resulted from this review has been, not surprisingly, new requirements coming from new home loans. Specifically, these GSE’s want to understand the current conditions of buildings. Building managers are being asked to make representations about recent building inspections, the results of these inspections.
But this isn’t Las Vegas; what happens in Miami doesn’t stay in Miami. That is, whenever buyers are looking for loans to purchase condominiums in buildings across the country, they may face these additional hurdles, too. Of course, this means New York City.
How This Impacts New York
We recently were asked to have a managing agent of a building along Park Avenue complete this disclosure form. Now, this wasn’t built in 1981. This Prewar cooperative building was building in 1921! This brick, cement and steel building constructed a century ago may have it’s issues, but I struggled for a moment to understand how a 15-story building with foundations in the bedrock of Midtown Manhattan is being treated the same as a building erected on top of sand.
Then I remembered this scandal in the building department in 2015. I also know that Lower Manhattan is well-known for the geologic challenges facing tower construction there (worth a read). I didn’t have to rack my brain too much more to recall a massive article about 432 Park Avenue.
In the first case, I have to take pause and consider how these actions of building inspectors may impact the structural integrity of whatever projects they’d been overseeing. Second, I actually agree that the conditions of Lower Manhattan, whether reading about the history of how Brooklyn Bridge came to be, or the development of Wall Street, might merit a closer look.
With the last, having seen a very recent sale of a unit for $70million at 432 Park, I am in the camp that is more than a bit skeptical about last year’s press. That is, those hit pieces seem to have been a bit more hyperbolic than whatever construction defects may actually be there. That’s not to say that new condos don’t have issues. They do. But developers seem to get sued nearly 75% of the time by their purchasers. I wonder if a lot of this is just standard operating procedure in the lifecycle of residential condo construction.
Safer Living Through Regulations?
Does This Regulation Help?
But never mind all of that. Banks are telling us that they are having to turn down loans if building managers will not comply with new disclosures and building disclosures. I have included a snapshot of form that Fannie Mae / Freddie Mac are requiring these days. It’s not that I don’t understand the reaction to the tragedy in Florida. But it seems like that kind of oversight is already in place. Building managers want to avoid liability in these cases- and will do all they can not to sign paperwork like this.
Let us consider that Fannie Mae and Freddie Mac are only getting involved in loans below a certain level. In mortgage world, they are called “conforming loans.” Since condo owners, or coop shareholders, have multi-million dollar investments in many buildings, wouldn’t it stand to reason that they would be far more concerned about the state of things in their home than Fannie Mae and Freddie Mac ever would?
I say yes. In New York, perhaps there is a one-bedroom apartment in a building for a which a purchaser is looking for a loan that falls under these guideline. At the same time, the larger units in the same building might be worth three- to five times as much. I would argue that these new requirements are probably overkill in most cases.
A Different Reason?
As I see it, it may not be about oversight, but a desire to pull back from underwriting home purchases to the same degree that has been going on. Maybe there’s a desire to avoid the collapse, figuratively speaking, of 2008, when the government absorbed massive losses in the homelending space. If this is true, private lenders and banks will have to step into the breach and hold more loans on their own books. As it is, lenders are pricing the conventional loans that FNMA and FHLMC will purchase at higher rates than Jumbo loans. That is, banks have less red tape to approve portfolio loans, and prefer financially stronger purchasers, anyway. Banks didn’t want to jump through the hoops before; these regulations make this lending space even less palatable.
As usual, the government may seek to protect those who aren’t as sophisticated from poor construction. But as a result, mortgage rates will be higher for them.
Coop Rules
As to the real life impacts of liability fears, building managers have gotten pretty crazy already. The insurance requirements for painting your apartment, hiring movers, even having some random guy come in and take away your books- or buy a tv on Craig’s List. All of that has gotten more onerous- and likely more expensive, too. Covering your a*# just keeps costing more. And if you thought it took a long time to get approved to buy in a cooperative building before, every additional questionnaire that must be completed only extends the pain a bit more! -Scott