Condo ‘blacklist’ killing sales in disaster-prone areas 

States like Florida and California are already dealing with a property insurance crisis. As natural disasters have become more frequent, more intense and more costly, homeowners and prospective buyers in those areas have found it increasingly difficult to obtain affordable coverage — or any coverage at all.

But hurricanes and wildfires aren't the only factors affecting property insurance. A new report from The Wall Street Journal found that one particular group — condo owners — are seeing sales fall through due to a "mostly secret mortgage blacklist" maintained by Fannie Mae.

The list, which included a few hundred properties prior to the deadly 2021 collapse of the Surfside condos in Florida, has been "greatly expanded" since then and now classifies more than 5,000 condo associations as underinsured, according to The Journal. With the cost of property insurance skyrocketing in Florida, that number is likely to increase.

Why Fannie Mae is keeping tabs on condos: While the finance giant isn't a direct lender, it buys and resells large numbers of mortgages — but only if those loans are adequately protected. And the requirements have gotten stricter, with Fannie providing more detailed guidelines last year, The Journal noted. 

The purpose of Fannie Mae's database is not to "blacklist" certain buildings, a spokesperson told The Wall Street Journal, but to "help protect borrowers from physically unsafe or financially unstable projects."

Loans effectively blocked: If a property appears on the list, however, that could be a deal-killer if the buyer plans to finance the sale. The state with the largest number of blacklisted condo developments — roughly 1,400 — is Florida, followed by other disaster-prone states including California, Colorado, Hawaii and Texas. 

Condo owners interviewed by The Journal described the challenges of selling a blacklisted unit, even after slashing the sale price. Some were lucky enough to find a cash buyer, and others were told by their condo association that they could pay for the additional insurance out of pocket — if they could afford it — to secure a buyer. 

Associations cutting costs: With insurance rates on the rise, some condo associations have tried to adapt by buying less comprehensive coverage. But that's exactly what could land them on the mortgage blacklist. 

One such condo — a Los Angeles development near the area devastated by wildfires earlier this year — was added to Fannie's list in December. To get back into compliance, the condo association would need to purchase a policy that costs 10 times what it had previously been paying, according to the report. 

"The timing of the blacklisting is horrific," association board member Jinah Kim told The Wall Street Journal. 

"Even though we were spared in the fires, we now don't have a snowball's chance in hell of getting affordable insurance" — which means current condo owners could be stuck with their units for the foreseeable future. 

A rock and a hard place: Some in the insurance industry warn that the more stringent rules could "destroy an entire marketplace," and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has been facing pressure from insurers who want to see the requirements loosened.

But others say that could leave new homeowners underprotected in the face of a potential disaster. "The argument of trying to loosen things up so that people can buy is unfortunately very shortsighted," Donna Corley, a former Freddie Mac exec, told The Journal. 

Meanwhile, recent shakeups at Fannie and Freddie could shift both the direction of the enterprises as well as their policies, with newly installed board members likely to have a say in what happens next with insurance requirements.