The Surfside Effect: Adjusting to new regulations in the aftermath of the Surfside collapse

As of the first week of December, the GSEs amended their Condo Project Advisor to include a new status of property, Project Certified. This label indicates that a condo project meets their general eligibility requirements for financing and is an effort to streamline the process of underwriting loans. Lenders can also make a Project Assessment Request to quickly learn if a property is eligible for the designation.

“What the agencies are doing — it’s not a secret — is they’re collecting all the data and they’re trying to make decisions and trying to clear buildings for lenders. They’re trying to do a bang-up job of ensuring that they also have a stake in the game; so they want to make sure it’s easier for originators,” says Tomaselli. “The condo marketplace, I think it’s like 70% of the marketplace in Florida, so you really have to take a good look at that marketplace. I think what’s going to happen over the next two years is that data is going to get better.”

“I think the adjustment period is where we are right now, and eventually we’re going to get a much clearer path, provided not only by the agencies, but by the lenders themselves doing their due diligence. And loan officers clearing a pathway as well for themselves.”

Two years from now, he foresees that the eligibility status of condo buildings and the nature of their compliance issues will be easily accessible by LOs.

“I think that most buildings are either going to have a checkmark next to them or an X next to them. It’s going to take a while for those buildings to get compliant, but originators are going to have better information in order to make educated decisions about what to wait on, what to spend their time on, and what not to waste their time on.”

The marketplace of non-warrantable and Non-QM lending has to make its own adjustments as the tide shifts.

“We’re having lots of conversations with the secondary market about what their risk tolerance is for buildings that aren’t compliant,” Tomaselli says. “I think that lots of new programs are going to be established over the next two years. Lots of non-warrantable lending is going to be established, and there is going to be a home for these loans that’s eventually going to get created that are non-warrantable and won’t meet Fannie Mae, Freddie Mac or FHA policy guidelines. I think that’s in process right now, but we’re not there yet.”

A lender his company works with recently rejected 200 buildings for various structural violations, post origination. This is an example of how business can change almost immediately with the advent of new practices and rules. “As units go into foreclosure, as properties take the time to kind of reestablish themselves as financially, structurally, and mechanically sound, and spend the money that’s necessary in order to fix themselves and be compliant,” Tomaselli says, “I think there are going to be a lot of opportunities for loan officers who understand the guidelines.”

State And Federal Action

The federal Fifth National Climate Assessment ranked the Southern U.S. high for climate risks, with increasing heat waves, inland and coastal flooding, as well as wildfires. The report indicates that preparedness levels remain low in Mississippi, South Carolina, Georgia, and Alabama. The exception is Florida, which ranks among the top six most well-prepared of all 50 states, with over 80 climate change mitigation and adaptation activities recorded since 2018.

Perhaps the most impactful of these was Senate Bill 4D (SB4D), passed by Florida’s Legislature in May 2022. Also known as “the Surfside bill,” this law heightened building safety and maintenance standards throughout the state.

SB4D allows for more flexibility in roof repairs as long as the remaining portion of the roof is still in good condition. Another provision mandates that condominium and cooperative association buildings over three stories high and 30 years old undergo a “milestone inspection” of structural integrity every 10 years. This also applies to buildings located within three miles of a coastline, upon reaching age 25 and every 10 years thereafter. These groups must conduct a structural integrity reserve study every 10 years as well to estimate the cost of future repairs and maintenance, then set aside reserves to fund them.

The Federal Emergency Management Agency (FEMA) redrew its flood map a few years back to include areas previously thought to be impenetrable. FEMA now requires “substantially damaged homes” (with repair costs exceeding 50% of assessed value) to be brought up to new standards of resilience. “Rebuilding to current standards decreases peril to life and property and prevents future disaster suffering,” FEMA said in its fact sheet.

But not everybody can afford to build a fortress by the sea.

Technology-powered real estate brokerage Redfin predicted in its 2023 annual end-of-year report that homeowners in places like South Florida, where prices have soared the last few years, will cash out their equity and move to more affordable areas.

Insurance

Lauren Maxwell, executive vice president of the Maxwell Mortgage Team of CrossCountry Mortgage in Naples, and one of the state’s top producers, says securing affordable insurance for borrowers has been her team’s biggest challenge lately.

“I can tell you that we’ve had last-minute things happen with insurance, and we have had to find a different agent that can insure the property for enough that the lender will accept,” Maxwell explains. “We can get insurance. It’s having it be affordable to the borrower so they can afford their monthly payment. Hopefully, there will be some form of insurance reform next year, but right now, we do the best we can.”

Maxwell has encountered some properties that are uninsurable altogether because HOAs have not acquired the correct coverage. “Unless an in-house lender in a bank wants to hold a loan for a totally larger payment and a higher interest rate, they will not be able to get normal loans in these projects,” she says. “We have run into that.”

The state-backed Citizens Insurance is available, but in many cases, it’s not compliant with lending guidelines. “So condo associations and boards are trying to cut costs in any way they can,” Tomaselli says. “And sometimes, when they cut costs or increase their deductibles, that also relegates them to not having mortgage financing available because they run afoul of lending guidelines. This is the underlying problem that comes after the tragedy that happened. There’s a second tragedy that happens financially for these homeowners.”

Just like an auto insurance company telling its accident-prone customers to take a hike, these insurers don’t have much tolerance for the unexpected and the overly expensive.

“Once a building files a claim, what we’re finding is their insurers are dropping them almost immediately,” Tomaselli says. “So they’ll pay the claim, and then the insurer drops the client, and for a condominium association in Florida to get new insurance on a property is incredibly difficult. In some cases, we’ve seen 300 and 400% increases in cost for the association.”

When a hurricane is in the forecast, insurance companies respond accordingly. Motto Mortgage’s Marcy Downey has their number, as the phrase goes.

“Typically, what will happen is the carriers within the state of Florida will stop writing policies for a specific window of time,” the Daytona Beach-based MLO says. “Even if the hurricane doesn’t hit us or it hits another part of the state, they’ll shut down for a few days or weeks.”

LOs who anticipate this happening tend to fare the storm better than those left in the dark. “Make sure your buyers have their new policies bound and ready to go prior to the halt of policies being written because that could slow down or make you miss a closing,” Downey says.

A strategy she employs is to work with insurance companies willing to provide coverage at the time of closing while affording buyers a two- or three-month window to complete repairs.

“They’ll close with a roof that maybe is older and has a little bit of damage; then they’ll have to get those repairs done before their insurance policy will continue. Sometimes, they’ll use the seller’s credit at the time of closing and put it towards the roof. The buyer can do it after if the insurance company is willing to give them that window … or they can use the rehab loan to have that money distributed after closing to have the roof completed.”

Finding Value

Appraisals also put LOs, buyers, and sellers through the wringer after flood damage. “There are quite a few single-family residences that were affected by the floods,” Downey says. “It’s difficult for people to purchase homes that flooded and weren’t finished. An appraiser is going to go in there, and the value is going to be subject to the completion of the repairs.”

It’s also not easy to finance homes with outstanding assessments, even if an LO has dealt with a particular property before. “There are a few condos that used to be easier to get financing for but that are harder now because the insurance premiums have gone up, so the condo associations have chosen different policies which are not adequate for financing. That has made it a little bit challenging.”

In many neighborhoods, the homes themselves weren’t damaged, but other structural elements like seawalls and pools still need to be rebuilt properly. Unless a buyer obtains an appraisal waiver, which is not permitted with agency loans, these repairs need to happen before closing.

Buyers with renovation stars in their eyes often have misinformation about the FHA’s 203(h) program, also known as the rehab loan. “They feel like, ‘we can fix this ourselves’ but the work has to be done by a licensed contractor,” Downey says. “They thought they could do it cheaply then tend to walk away when they realize it’s not as good of a deal as they had originally thought or hoped.”

LOs are relieved to encounter new construction to counter the state’s deteriorating infrastructure. New housing developments are being built to higher standards to meet the guidelines and withstand increasingly severe weather events.

“I would think that’s helping to mitigate future issues with natural disasters that might come in the future,” Downey says. “I think there’s less people potentially wanting to buy in the condo market because of what happened, and maybe more people wanting to sell.”

Cost-Cutting and Fee-Multiplying

Less than a decade ago, Florida home buyers asked very few questions of HOAs in regard to reserve money, maintenance fees, and structural issues. Today, those topics are critical to securing a mortgage and affording it for the life of the loan.

“Right now, we’re in this period of flux where there’s an education process that has to happen to board members and owners of condominium units in the state, and that education process doesn’t happen quickly,” Tomaselli says. “Anytime guidelines have been issued, it takes a while for that to promulgate throughout the industry and for property managers, board members, owners, and real estate agents to understand it completely.”

He predicts a “major shift” in home values during this new era, which beckons full disclosure about a property’s condition and mortgage eligibility. “Homeowners are now privy to what a reserve study is, and they want a copy of the report and analysis before they purchase their unit. I think it’s the reason unit values are going to plummet in certain areas of the state.”

Once a buyer discovers an HOA is planning a $3 million project in five years and fees will double, that could be a dealbreaker. In the state with the second-highest elderly population, many Floridians are on fixed income, making it impossible to pay more.

“Increased insurance costs, inflation costs on the repairs that need to be done … it’s going to become unaffordable for a lot of owners and values will have to drop,” Tomaselli says.

He urges LOs to educate themselves on the regulations and the compliance status of properties in the areas they do business. “We have lots of loan officers and banks in Florida that come to us and say, ‘what do you mean the building’s not compliant? We have to close this loan on Friday.’ And unfortunately, the answer is you needed to do your homework to understand why the building wasn’t compliant before originating a loan in that building. The loan officers and originators who take the time to look at their marketplace and create a list internally … I think they are going to do incredibly well,” Tomaselli says. “The smart ones always succeed. And that is one of the keys to unlocking massive wealth in this marketplace for loan officers.”

‘Worsening Winds:’ Report Finds 13.4M Properties To Be Newly Exposed

By Gary Rogo, Special To Florida Originator Magazine

Over 13.4 million properties in the United States will be newly exposed to tropical cyclones in 30 years, and Florida can expect a shift in the landfall of hurricanes from the south in cities such as Miami to more northern locations such as Jacksonville.

Those are two major conclusions of First Street Foundation in its peer-reviewed wind model, which identifies the likelihood and financial impacts of tropical cyclones in the contiguous U.S. up to 30 years in the future.

Titled “The National Risk Assessment: Worsening Winds,” the Brooklyn-based nonprofit research and technology foundation also released the findings and methodology leveraged to quantify this risk. The research combined high resolution measurements of well over 50,000 synthetic storm tracks to determine likely sustained wind direction and speed, adjust for local surface roughness effects on wind speed, and quantify the probability and magnitude of 3-second gusts that drive the majority of wind-related losses.

“Quantifying hurricane wind exposure and the resulting financial implications for every property in the country ushers in a new era in the understanding of the physical impacts of climate change,” Matthew Eby, founder and CEO of First Street Foundation, said. “Compared to the historic location and severity of tropical cyclones, this next generation of hurricane strength will bring unavoidable financial impacts and devastation that have not yet been priced into the market.”

The increasing exposure of the 13.4 million properties is due to the greater proportion of hurricanes that are expected to reach major status (Category 3-5) today and into the future, and the greater likelihood that storms will track farther northward along the East Coast. The shift in location and strength of hurricanes in Florida, the most exposed state, results in the number of properties that may face a Category 5 hurricane from 2.5 million in 2023 to 4.1 million by 2053.

In partnership with the New York City global consulting and engineering firm Arup, First Street calculated the dollar value of expected damage and the associated downtime for each specific building structure. These property level damage estimates show that on average, the country can expect to see an annual loss of $18.5 billion this year resulting from hurricane winds, increasing to just under $20 billion dollars in 30 years. Of that $1.5 billion in additional damages, roughly $1 billion of that comes from increased exposure in Florida alone.