California Condos Placed on ‘Mortgage Blacklist’

More than 700 homes in California have been placed on a “mortgage blacklist.”

A “mortgage blacklist” is an unofficial term that refers to a list of individuals, often compiled by lenders or financial institutions, who are considered high-risk borrowers due to their lack of insurance or poor financial history.

Being on such a list can make it extremely difficult for buyers to secure a cheaper conventional loan, which means that the person is less likely to be approved for a mortgage or may face higher interest rates if they apply.

Why It Matters

As condos are excluded from conventional loan eligibility, owners may struggle to sell their properties, potentially leading to foreclosures and financial losses.

What To Know

The blacklist, first reported by The Wall Street Journal, is maintained by Fannie Mae. The government-sponsored entity doesn’t directly issue loans but, along with its sister company, Freddie Mac, purchases nearly half of all home loans, bundling them to sell to investors.

Newsweek reached out to Fannie Mae for comment via online form outside of regular working hours.

Fannie Mae’s blacklist has grown in recent years for several reasons. The organization has become more cautious about backing properties that are underinsured, dilapidated, or lack sufficient reserves for maintenance.

This has been the case since the 2021 Surfside condo collapse in Florida, which killed 98 people. Before the collapse, there were significant problems with the building’s foundation, including the corrosion of steel reinforcement in the concrete slab and water damage to the structural elements.

However, an investigation revealed that the building’s condo association deferred necessary repairs, likely due to the high costs and complexities involved. These structural weaknesses and the lack of timely maintenance ultimately led to the catastrophic collapse.

In response, condo associations with insufficient insurance or those facing major maintenance issues became more vulnerable to being excluded from conventional loan eligibility as lenders sought to mitigate their risks.

Additionally, the increasing frequency of natural disasters like wildfires has raised concerns, as properties without adequate insurance coverage for such events are considered too risky. At least 10,000 structures were destroyed in the Southern California wildfires in January.

As of March 11, the number of properties on the blacklist in California reached 733, Stephen Marcus, a condo lawyer at Allcock & Marcus law firm, told The Wall Street Journal. This is an increase from 695 properties the previous month.

In the Bay Area, San Francisco has 21 properties on the list, and San Jose has 18. In Southern California, Los Angeles has 37 condos listed, while Pacific Palisades—one of the cities most affected by the January wildfires—has 28 properties on the list.

In January 2024, Fannie Mae blacklisted the majority of units in Rossmoor, an upscale retirement community of 6,700 homes south of downtown Walnut Creek in Contra Costa County, leaving real estate agents in a panic.

“For a while there, we were in a panic — no one was lending,” real estate agent Larry Spiteri told The Mercury News. He added that with no lenders offering qualified mortgages, only those able to find a cash buyer were selling their homes. As the pool of potential buyers shrank, he said home values in the community temporarily dropped.

Eventually, business picked up again after local mortgage broker Mary Niles found alternative lenders willing to offer non-qualified mortgages to buyers. These typically come with somewhat higher down payment requirements and interest rates.

But Niles said if she’d had Fannie Mae’s approval, she and her buyers would be in a “better place.”

A spokeswoman for Fannie Mae told The Wall Street Journal that its requirements are designed to “help protect borrowers from physically unsafe or financially unstable projects.

This month, a report by the California Association of Realtors (CAR) revealed that California’s housing market experienced a significant rebound in February, with existing single-family home sales reaching 283,540 on a seasonally adjusted annualized basis.

This marked an 11.6 percent increase from January and a 2.6 percent rise from February 2024—the highest sales level since October 2022, signaling renewed buyer activity after a sluggish start to the year.

What People Are Saying

Real estate lawyer Tyler Burding told The Mercury News: “There are many condos that are rotting from within. They need reconstruction. By the time HOAs get the numbers of what that’s going to cost, there’s no way to raise the money. Banks won’t lend it. The owners can’t afford to pay it.”

What Happens Next

Burding believes that Fannie Mae will likely expand its blacklist in California as many condos built 30 to 40 years ago begin to deteriorate due to years of deferred maintenance and underfunded reserves.