By Jeff Kerrane, Esq., Kerrane Storz P.C.
Following the tragic collapse of the Champlain Towers South in Surfside, Florida, Fannie Mae took a significant step to modernize lending requirements. These new requirements place a greater emphasis on the property condition and the strength of the community’s reserves. In response to growing concerns about aging infrastructure and extensive deferred maintenance in certain buildings, Fannie Mae introduced a series of measures that will have a profound impact on the condominium market.
In 2021, Fannie Mae unveiled the Temporary Requirements for Condo and Co-Op Projects, a set of guidelines that reshaped the landscape of mortgages in condominium associations. Earlier this year, Fannie Mae amended the temporary requirements, and made them a permanent part of their underwriting standards. The new permanent rules are effective as of September 18, 2023.
Seventy percent of home mortgages are supported by Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac are private corporations created by Congress to provide liquidity in the mortgage market. Fannie Mae and Freddie Mac buy mortgages from lenders and package them into mortgage-backed securities that may be sold. Fannie Mae and Freddie Mac have thousands of pages of regulations that provide the standards by which mortgages can be approved. Mortgages that qualify under these regulations are often referred to as “conforming” or “conventional” loans.
The first step in determining which Fannie Mae underwriting rules apply to your community association is to know which level of review will apply under the Fannie Mae guidelines:
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Full Review
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Limited Review
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Review Waived
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New Condo Project
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Established Condo Project (with a high loan to value ratio)
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2-4 Unit Condo Project
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Co-op Project
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Detached Condo Project
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Manufactured Home Project
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PUD
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Under the Fannie Mae rules, a condo project includes associations where the owners each own an undivided interest in the common area. A PUD is an association in which the HOA owns the common property. PUDs would include most single-family home and townhome communities.
FULL OR LIMITED REVIEW
For projects subject to a full review, the new Fannie Mae requirements will exclude from financing eligibility any of the following:
- Projects in need of critical repairs which significantly impact the safety, soundness, structural integrity or habitability of the project
- Projects with mold, water intrusion, or potentially damaging leaks
- Projects with advanced physical deterioration
- Projects that have failed to pass any state or county inspections
- Projects with unfunded repairs exceeding $10,000 per unit that should be undertaken in the next year
- Projects with evacuation orders due to an unsafe condition
These disqualifications allow for a few exceptions where projects may still be eligible for financing, such as projects where the damage or deferred maintenance is isolated to just one or a few units, and does not affect the overall safety, soundness, structural integrity or habitability of the project. The new rules also will not exclude projects in need of only routine repairs that are preventative in nature and are accomplished through the HOA’s normal operating budget or through special assessments that are within guidelines.
In addition, Fannie Mae will now look at an HOA’s reserve funds to ensure that the HOA is budgeting at least 10% of its assessment income to reserves. Alternatively, the reserve funds will be deemed acceptable if the HOA has adequate funded reserves that meet or exceed the recommendations included in the HOA’s reserve study.
The new requirements will now strongly advise lenders to review, at a minimum, the following documents:
- HOA board meeting minutes
- Engineer reports
- Structural and/or mechanical inspection reports
- Reserve studies
- A list of necessary repairs provided by the HOA or the HOA’s management company
- A list of special assessments provided by the HOA or the HOA’s management company
Fannie Mae’s guidelines also extend to special assessments. Lenders must review current or planned special assessments, seeking documentation to ensure they don't negatively impact the project's financial stability, viability, condition, or marketability. In the case of assessments related to safety, soundness, structural integrity, or habitability, Fannie Mae requires that all repairs be fully completed.
REVIEW WAIVED
Fortunately for owners in PUD projects, these new Fannie Mae requirements will not apply. PUDs need only meet the normal Fannie Mae underwriting requirements.
The collective impact of these new modern lending standards is expected to render many condominiums ineligible for loans, potentially affecting the ability to buy and sell condominiums and, ultimately, property values. HOA boards and community association managers will need to become familiar with the new rules and adapt their reserve and maintenance practices to ensure their future viability and safeguard their property values.
Jeff Kerrane is a shareholder with Kerrane Storz, PC, which exclusively represents property owners and community associations in construction defect litigation. Jeff can be reached at jkerrane@kerranestorz.com or at 720-277-2076.
