Are Fannie Mae and Freddie Mac Standards Disrupting Deals in Commercial Real Estate?

In the world of commercial real estate, the shifting landscape of insurance requirements is causing serious disruption to deals. Recently, Fannie Mae and Freddie Mac, the government-sponsored enterprises that back a significant portion of multifamily and commercial real estate loans, updated their general liability (GL) insurance requirements. However, the new mandates are proving to be a major challenge for borrowers and brokers, as they often conflict with market realities, creating compliance burdens and increasing financial exposure.

The New Mandates: A Problem for Borrowers

The updated standards set by Fannie Mae and Freddie Mac now include requirements for high-risk liability coverages, such as assault and battery, sexual abuse and molestation, and habitability. While these types of coverages are designed to protect against some of the most serious risks, they are becoming increasingly difficult to secure in today’s insurance market.

“Insurers are tightening up underwriting and declining to offer these protections even at steep premiums,” says Danielle Lombardo, Chair of Willis Towers Watson’s Real Estate, Hospitality, and Leisure division. “In many cases, coverage is sub-limited or entirely excluded from multifamily portfolios.”

For brokers, this means a growing struggle to secure adequate coverage. The stakes are high, as failing to meet these coverage requirements can disrupt deals and hurt property owners’ financial health.

Escalating Costs and Financial Strain

The problem isn’t just that coverage is becoming harder to find, it’s that the financial costs of compliance are spiraling. Lombardo explains that if a borrower cannot obtain the required coverage, they may be forced to reserve or escrow up to $250,000 for each coverage they’re unable to secure. In some cases, these requirements could force an asset paying a $100,000 annual premium to suddenly commit hundreds of thousands of dollars to cover exclusions.

At a time when interest rates are already high, these unexpected expenses are a serious burden. “Most assets are already cash-strapped due to rising rates and broader market pressures,” says Lombardo. “Simply put, there’s no extra capital available to cover these unforeseen insurance costs.”

This additional capital requirement could be the breaking point for many deals. In a highly sensitive financial environment, every dollar spent on insurance increases expenses, thereby reducing the overall value of a property.

The Regional Impact: A Focus on High-Risk Areas

The impact is even more pronounced in states that are known for “nuclear verdicts” large jury awards in liability cases. States such as New York, Florida, Texas, and California are seeing insurers exit high-liability sectors due to the increasing litigation costs. In these jurisdictions, underwriting is tightening rapidly, and affordability is deteriorating, making it even harder for borrowers to comply with the new insurance mandates.

“The underwriting landscape is changing quickly,” Lombardo says. “Insurers are more selective, and the affordability of coverage is deteriorating just as risks are rising.”

For brokers, it’s no longer just about sourcing a policy; it’s about negotiating strategically with lenders to ensure that deals can move forward.

The Broker’s New Role: Strategic Negotiation

To navigate these new insurance requirements, brokers must be more than just policy experts; they must now act as strategic negotiators. Lombardo notes that securing strategic waivers from lenders has become a core part of a broker’s role. Lenders, understandably, want to protect their collateral, but brokers need to demonstrate that all options for obtaining the required coverage have been exhausted. This involves offering a comprehensive risk management narrative that highlights efforts to manage risk through loss control, contractual risk transfer, and other measures.

“Securing waivers and demonstrating risk management efforts has become the norm, not the exception,” Lombardo adds. “It’s a heavy lift, but it’s essential to moving deals forward.”

Brokers are finding success in these strategic negotiations, but it’s no easy task. The new requirements represent a growing disconnect between the financial realities of the insurance market and the expectations of lenders, placing brokers in a difficult position where they must meet both parties’ needs.

A Growing Disconnect Between Lenders and Market Realities

As insurers face mounting litigation costs, particularly in high-liability areas, they are tightening coverage and increasing premiums. However, lenders are increasingly mandating coverages that insurers can’t or won’t provide. This growing gap between lending standards and market availability creates an environment where deals could be delayed or even canceled if insurance requirements can’t be met.

“It’s not just a coverage issue,” says Lombardo. “These requirements can determine whether a deal gets done at all.”

If this trend continues, it could have a far-reaching impact on the future of commercial real estate development. Lombardo warns that a lack of adequate coverage options could lead to a reduction in multifamily supply, as developers may be unable to secure financing or insurance to cover the higher costs associated with the required coverages.

Looking Ahead: Flexibility and Collaboration Are Key

So far, other major lenders have not followed in Fannie Mae and Freddie Mac’s footsteps, but Lombardo believes it’s only a matter of time before they do. With the updated standards being newly enforced, it’s uncertain whether the trend will spread.

What is clear, however, is that more collaboration is needed between brokers, lenders, and borrowers to close the gap between insurance requirements and market realities. “Lenders are not wrong for wanting robust coverage,” Lombardo states. “But the solution cannot be pushing borrowers into requirements that simply don’t exist anymore. Flexibility, or at least a modernized approach, is crucial.”

As brokers adapt to these evolving requirements, there is an opportunity to lead the way in risk management and negotiation. But the stakes are high, and with insurers becoming increasingly selective and premiums rising, the margin for error is shrinking.

Ultimately, the future of real estate deals could depend on how well the industry navigates this complex insurance landscape, one where flexibility, innovation, and collaboration will determine whether deals succeed or fall apart.