What impact did the Champlain Towers South collapse have?

Richard: [00:00:24] Hello and welcome to a new episode of MPA TV. I'm your host, Richard Torne, mortgage professional, America's news editor. And today, we'll be chatting with another leading mortgage professional to discuss their career. Orest Tomaselli has been described by industry professionals as an expert on all things condominium, lauded by many of his peers as the most knowledgeable person in the field. As the current president of Project Review Condo Tech, a premier resource of data and technology solutions for the condominium lending market. He brings more than 13 years experience to the table educating lenders. Orest was also the CEO and president of the National Condo Advisors for more than a decade, coinciding with the tragic Champlain Towers South collapse last year in which 98 people were killed. The tragedy was a watershed moment for the industry. As a result, Fannie Mae and Freddie Mac updated their investor guidelines, which came into effect in January, ostensibly to ensure the safety of condos. But the move has proved controversial, with critics claiming it will make it much harder for condo buyers to receive financing. Hello and welcome, Orest.

Orest: [00:01:30] Thank you very much for having me.

Richard: [00:01:31] It's great to have you with us today. Now we're going to be discussing your career in more detail in a moment, but I'd like to begin with the champion towers south collapsed. What impact did it have on you at the time, both on a professional and personal level? 

Orest: [00:01:43] On a personal level. I'll tell you, I remember exactly where I was. There were a few events in my life where I know exactly where I was. When I heard the news stop the car pulled over onto the side of the road as I was driving and started making phone calls first to see that if we had ever been involved with that particular project, because we are involved in so many condominium developments across the country, if we had ever reviewed it for a lender, if we were involved in any aspect of it or of any with any of the people who were involved in the management of that property or lending in that property, you know, when when you get over the initial shock of what happened. And I also, you know, I've talked to my team about this several times. I don't think a lot of the guidelines would have changed in the fashion that they did if we didn't actually see that building collapsing. Everybody saw the video and it was a shocking event. And so when you look at that and look back a year and see what impacts it has had, it's just been incredible how many impacts have kind of bled through the entire industry.

Richard: [00:02:55] Now, the accident happened in the Miami suburb of Surfside in Florida. And Florida reportedly has the greatest number of condominium developments needing major structural repair work in the country. Currently, Fannie Mae will not do business with these. Now, I understand you've been closely following developments. And last month you held a national webinar with the Mortgage Bankers Association to explain these new guidelines, a lot of them to a neophyte such as myself. They appear reasonable. They ask condo owners to perform regular maintenance on buildings, keep reliable records on repairs and to budget accordingly. But why are you not happy with these guidelines? 

Orest: [00:03:33] I think all in all, their game changing for the industry and for condominium boards and lenders for sure. I think that they've written the spirit of them is is fantastic, meaning that exactly as you've outlined, you really want to make sure that these properties are in good working order, that their components are maintained in a in an adequate fashion, and that they have enough capital set aside in order to make future repairs on these developments. What is difficult to swallow is the fact that these guidelines almost seemed instantaneous, meaning that Fannie Mae came out with their guidelines in January, and instantly we were the industry was forced to comply with them. This is this is going to be a long process. This is going to be a long process of getting these developments that haven't needed to be compliant in this fashion. Compliant. Our estimates right now are that it'll take approximately three years for developments to kind of get down the road of figuring out which components have to be repaired or replaced, which structural inspections have to be performed. Setting aside enough capital or setting up the process of setting aside enough capital to repair future component replacements and repairs. It's going to take a while to happen. And I think my biggest issue with it is not that the guidelines aren't good because I think they're great and I think they're needed in the industry. But the timeframe in which these developments are required to comply with these guidelines. 

Richard: [00:05:19] Nobody has a magic wand or can see into the future. But this is a highly charged question. But kind of tragedy like Champlain Towers ever happen again? Absolutely. 

Orest: [00:05:33] You know, on average, we see about a little bit over 2000 condominium developments per month where we're either reviewing the condominium documents or collecting the condominium documents at condo tech. And we have a really good idea of what's happening in the industry and how many of those developments are compliant, how many are not compliant, and how many, you know, you wouldn't want to live in at all based upon the current situation and that specific development. So the numbers break down as follows Around seven out of ten developments that we review are compliant with Fannie Mae's guidelines. That means that those developments and those condominium boards and managers did a very good job over the last however many years or decades in managing the repairs and maintenance to the structural components in the building, setting aside enough capital so that they had money set aside for future repairs and really set them up, set themselves up in a fashion where lenders would be happy to lend in those buildings in an instant. About two out of the ten that we review are properties that have problems but are managed relatively well and have to comply with these guidelines. And maybe with a little bit of work and a little bit of time, they can comply easily and that may be completing a substantial repair that was started in the development or updating their operating budget to include more capital for reserves. And those developments we look at as developments where we want to live in or we'd want to buy a unit for our mom. Right. Those are good developments, but they just need a little bit of work. And then about one out of ten are developments that have massive structural issues or problems with their financials or have severe deferred maintenance on a lot of the components within the development. They haven't done work or repairs to a lot of these systems that are necessary to keep the building habitable. And we find those pretty readily. And one out of ten may not seem like a big number, but that's about 200 individual condominium developments a month that we're looking at and saying, you know, these are not these are these these are not projects we want to live in and do not comply with. Fannie Mae's lending guidelines. 

Richard: [00:08:15] Notwithstanding what you've just said, forgetting for a moment that that incident do do condos get get a bad rap in the US. And what are the most common misconceptions about these types of homes? 

Orest: [00:08:28] I think that there are a lot of very well managed properties. I think that there are a lot of very good volunteer boards that really have the best interests of the owners in mind when they make decisions for the entire development. I don't think they necessarily get a bad rap. I think that there are outliers in every aspect of real estate and I think there are. We tend to pay attention to them more just because there is such egregious examples of problems. But I think by and large, what we've found is that most boards and most buildings really want to do the right thing and really want to have a habitable, well operating and well funded development for the owners that are there. 

Richard: [00:09:22] I was just going over some figures. Some of them may not be up to date, but although single family homes are still the preferred option for 80% of Americans, I understand between 17 and 27% living in an apartment, a condo. And given that there's a housing shortage crisis in the US and that housing affordability is one of the biggest issues in the country, how important is it to have a healthy condominium market? 

Orest: [00:09:46] Well, it's incredibly important. And you know, what's the old saying? You know, God isn't making any more land, right. So what we could see for the future in the United States is many more condominium developments being created and built across the country. In fact, there are certain instances where in Florida, buildings are being bought out by developers. Condominium developments have been standing for 30 years and developers are coming in and buying out all the units from the homeowners who live there, knocking the building down and building something bigger. Right. So there are. It's incredibly important for the marketplace. I know that. And I think your numbers are are pretty on pretty accurate, actually. It used to be around 12 to 15% of the marketplace was condominium and now the numbers are growing. It's what we're going to see in the future. It's the type of development and the type of home that we're going to see. Most people in the United States will eventually living in will eventually tip over to that side and away from single family housing. 

Richard: [00:10:55] What other challenges are facing the sector and how concerned are you about current economic headwinds? 

Orest: [00:11:00] Yeah, so there's a lot the impacts are if you really drill down on them, there is a cost associated with compliance. So a condominium board has to make some pretty big decisions about what maintenance costs are for the residential owners. So in order to perform these repairs, to get compliant or to get the studies, engineering studies that need to be performed on these developments, performed in a timely fashion, there's a lot of cost that's associated with doing that. And then when you identify what the issues are, you know, there's even further cost, right? In some buildings, we're seeing compliance costs, let's call them, and repair maintenance costs that are in excess of 2 to $4 million in some buildings and some properties. And of course, that bleeds into every single homeowner's pocket. Right. You know, you're talking about maintenance costs are going to rise substantially. So it's interesting. What's happening right now is that not only do you see maintenance costs increasing because of inflation increasing and costs increasing across the board for these developments. I saw one stat that said that on average, maintenance costs were going up between six and 9% for every development and coming in 2023. And that's without any of these compliance and or repair costs that are have to be borne by those owners. So there is a major headwind coming for, you know, these developments. And what we see happening is that, you know, unfortunately, we we see prices are not only going to level out, but in many of these existing established developments and even some of the new construction developments that are being created right now, we're going to see price drops and value drops, especially on properties that do not comply with these lending guidelines. I mean, that's almost a a disastrous, you know, path that these developments are on. 

Richard: [00:13:16] I'd like to ask you a bit more about your career and your your personal trajectory and career trajectory. I'd like to ask you, what attracted you to this particular segment of the market in the first place? 

Orest: [00:13:28] It's funny, I think as a lot of my counterparts were, I started out in the lending world working for large mortgage bankers and banks across the industry, you know, 20 and 25 and 30 years ago, and not only in the initial stages, originating loans, but then I kind of worked my way into compliance in making sure that these loans that were being performed within these banks were compliant with the lending guidelines. And I was so intrigued by that because we saw such a lack of knowledge in the industry or I saw such a lack of knowledge in the industry on people who really didn't know how to make a building compliant or how to make a, you know, the values increase in some of these existing established condominium developments just by kind of tweaking them a little bit. And I started National Condo Advisors and launched the firm and for 13 years we became the premier condominium project approval firm in the country. And the staff that I built there, you know, I like to call them all geniuses because they were all condominium compliance experts. And in fact, over the years we were able to pull in staff from the GSEs themselves. And we've had employees that came directly from Fannie Mae and from Freddie Mac and from the FHA that we were pleased and happy to have on staff because they had so much industry knowledge as well. And then at the end of last year, I essentially joined and my company, National Condo Advisors, was acquired by condo tech. And Condo Tech was a firm that was also incredibly well known in the industry for collecting the condominium documents that were necessary for lenders to review. So. All of their clients were lenders. And our thought was that with the acquisition, kind of tech would not only be able to provide the condominium documents and cooperative documents that were necessary for a review by these lenders, but also providing the reviews themselves and providing a very unique service that encapsulated not only document collection, but also this review process and warranting these these condominium developments to these lenders and saying that they were worthwhile to lend in and they would comply with the anyways guidelines. 

Richard: [00:16:00] How much has the sector changed since you started and have you seen wide sweeping changes? Again, this obviously links the question to the earlier incident we were discussing in in Florida. But aside from that, have you seen big changes in the industry?

Orest: [00:16:19] I think that when I started in the industry, it was prior to the 2008 mortgage crisis, and not a lot of developers and or lenders paid attention to condominium lending. It was the the also ran of the industry. And after the mortgage crisis and what happened in the mortgage crisis is that large swaths of certain states, essentially their condominium developments in those states essentially went into foreclosure and the agencies really got hurt really badly. A lot of lenders went out of business. And what they traced that back to and finally, when they unwound it and tried to understand why all of these losses occurred within these developments, they realized that they really weren't paying a lot of attention to the construction of these buildings, the financials of these buildings, the financial wherewithal of the property itself, the insurance on these buildings and all of these guidelines started to come in, be required of these condominium developments in order to protect the assets of these of the GSEs and the large lenders out there. So we saw a major shift in the industry after the lending crisis occurred, and that has ebbed and flowed over the years. Right. Because as money became cheap to borrow, guidelines were loosened a little bit to Fannie Mae and Freddie Mac's credit. They kept the same policies in place and try to enforce those policies. But there are always lenders in the industry that came in and would buy up swaths of condominium loans or offer balance sheet lending that went against these guidelines. And so there were these ebbs and flows of compliance and non compliance and compliance and non compliance. And then Surfside has now changed everything, and every single development is now under a very watchful eye because it's not just Fannie Mae and Freddie Mac. Now, other lenders are looking at their portfolio of assets and wondering, do I have one of these buildings that we've lent in that is not compliant or is going to suffer the same tragic fate and very concerned about it? 

Richard: [00:18:53] Right. And finally and this is a question I ask all my guests, if you could give a piece of advice to your younger self starting out in the industry, what would it be? 

Orest: [00:19:03] Wow, that's a fantastic question. I always have to think about that for a second. You know, this world of condominium lending, I wish I knew that it was going to be as large as it is. I always thought that it was a very niche type of business and it is no longer really a niche type of business. There are you know, the future of this world is just gigantic. You're going to see many changes coming in the industry, many properties coming in, industry being developed and being built. What we're seeing in some of these large cities like Miami or New York or or in Los Angeles, we're seeing these very unique buildings being constructed where you have large condominium development and a commercial property attached to it and all insane services that are being offered within these developments and just really amazing places to live. And I wish that I knew that. I wish I had that crystal ball and I wish that I, you know, essentially did more years ago to kind of. What with myself at this point in time in my life in pushing and doing more condominium lending compliance at an earlier stage in my life. 

Richard: [00:20:34] Well, on that sage piece of advice, we end today's show. Orest, it's it's been great talking to you. Thank you for joining us today.

Orest: [00:20:42] Well, thank you so much for having me. And I really appreciate the time. 

Richard: [00:20:46] And thank you to everyone for watching. I've been your host, Richard Torne. Please join us again in two weeks time for another edition of MPA TV. Goodbye.