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New rules on condos

March 26th, 2023 10:06 AM by Sam Kader MLO130505

Buying a condo in 2022 is starting to get a little more challenging due to recent condo rules effective 1/1/2022. Fannie Mae and Freddie Mac's (Government-Sponsored Entities or GSE) new reporting disclosures on mortgages for condominiums and units located in HOAs went into effect on January 1st 2022. As a result, boards of directors and management companies will see changes in how they report the financial health of their association. The GSE is instituting this as a stopgap measure while it examines how it can mitigate the growing risk of dangerous property conditions in a market where buildings are starting to deteriorate due to their age. This has been exemplified by some recent public safety incidents in Florida, like the deadly collapse of a Surfside condo building in June 2021 and debris from half of the balconies on a 23-story building in Sunny Isles Beach breaking off and endangering those below.

Associations with major deferred maintenance that has been inspected through the reserve study process or local government agencies stating major structural or mechanical repair are required will not be eligible for lending. Those with more extensive deferred projects may need to provide additional information and documentation for lenders. 

  1. Fannie will not purchase condo projects as loan collateral include those that require full or partial evacuation for seven days or more to complete repairs. Also barred will be buildings where the evacuation time is unspecified.
  2. Fannie additionally lists three categories of deficiencies, defects, substantial damage or deferred maintenance that would bar a loan from purchase: 

                  I) Those that affect safety, soundness, integrity or habitability; 

                 ii) Those that need substantial repairs or improvements; or 

                iii) Those that impair major mechanical or structural building elements such as the roof, plumbing, or electrical system. 

Please ask the Listing Agent for any current/pending special assessments, or repairs on the Condo Unit/Project. Two documents  to detect these items ahead of time are in Condo Resale Certificate and Form 17 - Seller Disclosure Statement (Question # 6) Please request them ahead of time before you make an offer. (Listing agent should have these documents readily available on their listing).  In addition - Conventional lenders will be required to complete  the condo Review Questionnaire prior to final loan approval. 

Condo associations must be able to provide an acceptable certificate of occupancy or pass local inspections or recertifications in order to be approved with  Fannie or Freddie again.  Projects will remain ineligible until necessary repairs or authorizations have been completed and documented. In addition to these measures, 

  1. Fannie is requiring documentation for properties with special assessments related to the amounts involved and the purpose, even if they’ve been paid in full.

Condo projects  with normal deferred maintenance projects will not be affected such as routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property.  Also, if damage or deferred maintenance is isolated to one or a few units and does not affect the overall safety, soundness, structural integrity or habituality of the improvements then these condo projects eligibility requirements do not apply. Examples of this scenario include water damage to a unit due to a leaky pipe that is isolated or damage from a small fire impacting the interior of a specific unit.  However, if the subject property unit is affected, then standard requirements for property condition apply. 

Why this matters

Fannie Mae and Freddie Mac are by far the largest single-family mortgage buyers in the country; for perspective, these two entities purchase or guarantee about 70% of all mortgages created in the United States.  The underwriting requirements and guidelines that they produce set the standards for documents used by all domestic mortgage lenders. When these two mortgage goliaths tweak their procedures, the entire mortgage market responds. Most private lenders model their internal guidelines to mirror Fannie Mae’s.

Although Fannie Mae and Freddie Mac indicate these changes are temporary, they do not mention an end date. This omission is causing many market professionals to anticipate that the changes may become permanent. These changes sound troubling at first. But, once we carefully examine the lender letter (LL-2021-14 - see below) and the updated HOA cert form that Fannie Mae has created called the 1076 form, they are not as onerous. The updated standardized form that Fannie Mae released blends the requirements for both limited and full condo review questions. One outcome of the new form is improved transparency for all borrowers, sellers, and lenders. Some alarmists are concerned that these changes will require additional work and more documentation for the HOA’s and lenders. However, in reality, these changes are nothing new. Fannie Mae designed the HOA form 1076 and the questions around disclosure, decades ago. The revised 1076 form consolidates the info into one central document that is easier to review. One goal of the redesigned form is to provide more transparency for all parties.

What is the lender letter asking?

The Lender Letter (LL-2021-14 - see below) from Fannie Mae specifically asks for lenders to find out from an HOA the state the project, “…projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions.”  The letter continues if the project is undergoing major deferred maintenance. A project deferred maintenance is defined as:

  • A project or deficiencies that cause a building evacuation for more than 7-days or an unknown duration.
  • A Condo that's in need of substantial maintenance that is severely impacting the safety or habitability.
  • The repairs needed for the major components of the project and the need for repair are severe.
  • The repairs needed to impede the safe and sound usage and functioning of the project’s major structural mechanical, and structural elements.
  • The project has failed to achieve acceptable certificates of occupancy or pass local regulatory inspections or re-certifications.

The guidelines of the lender letter note that these DO NOT apply to regular deferred maintenance projects. That said, the Condo Questionnaire form still asks for additional information and disclosure concerning the non-major deferred maintenance projects. Providing the additional information on the Condo Questionnaire form will eliminate the need for more documentation, for less severe deferred maintenance projects.

What other changes were noted in the lender letter?

The updated guidelines from Fannie Mae call for the disclosure of any special assessments to be included on the HOA Cert./Condo Questionnaire This is the same information the HOA management industry has provided for decades. The main difference is that now this information is noted on the HOA cert form for easy disclosure to the borrower. Also, the updated guidelines specify that if the HOA is not allocating 10% to their reserve accounts, the budget may not be acceptable. In the past, the use of a reserve study was considered acceptable. With the new guidelines, this is unfortunately no longer the case. However, they do allow lenders to request a waiver on this issue directly from Fannie Mae. Although it should be noted that Fannie Mae waivers are applied for and not guaranteed to be approved as they are done on a case-by-case review.

What does this mean for sellers and HOAs?

These guideline changes will require management HOAs to fill out the new longer form. Fortunately, the questions on the new form are the same questions that they have used for decades. The difference is that now all of the questions are consolidated in one form. If the project is going through major deferred maintenance, the HOA or HOA Management company could still be required to answer a few additional questions. These questions need to be answered anyway as part of required HOA disclosures.

HOA Management companies and sellers will need to work within their budget meetings to make sure their annual budgets meet the new requirements. Sellers would be well-served to stay up-to-date with information about their HOA’s and attend board meetings. HOA members participating in these meetings will help unit owners become savvier about the overall condition of the association.

What do these changes mean for lenders?

Lenders will need to use the updated HOA cert forms that contain the additional questions. The information on special assessments and deferred maintenance projects will be required regardless of limited or full review to do a loan backed by Fannie Mae and Freddie Mac. See example of Limited Condo Review Questionnaire from one of our lenders. 

Lastly, what do these changes mean for borrowers?

In a word, these changes mean more transparency for borrowers. No longer will condo buyers move into their units only to find construction crews unloading outside their homes. They should no longer be surprised to learn about a major maintenance project. Ideally, there will no longer be a surprise special assessment. An overarching goal of the changes is that borrowers will buy with more confidence.

Copy of the Lender Letter (LL-2021-14) from Fannie Mae here

Posted in:Condo and tagged: Condo
Posted by Sam Kader MLO130505 on March 26th, 2023 10:06 AM



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