In the early morning hours of June 24, 2021, the now infamous Champlain Towers South condominium in Surfside, FL, collapsed, killing 98 people. Investigations revealed construction defects, long-term water infiltration and years of deferred maintenance. The natural question in the aftermath of such a tragedy is, “What can we do to prevent such a tragedy from ever happening again?” The Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) recently issued additional requirements lenders must meet in order to make mortgage loans eligible for sale to Fannie Mae or Freddie Mac. These new requirements deal specifically with structural integrity of buildings and deferred maintenance, as well as special assessments and replacement reserve funding, and will have a significant impact on information most condominium and cooperative communities will be asked to share with lenders.
Who Are Fannie Mae and Freddie Mac?
Fannie Mae and Freddie Mac are government-sponsored entities whose purpose is to support mortgage borrowers by providing liquidity to lenders. In essence, a mortgage lender makes a loan to Jane Doe to purchase a home. But for Fannie Mae and Freddie Mac, mortgage lenders would have limited assets, which would limit how many loans they could write. However, once the lender closes on its loan to Jane Doe, Fannie Mae or Freddie Mac buys that loan from the lenders, provided the loan meets the lending requirements of Fannie Mae/Freddie Mac. These purchases provide cash to lenders who can then underwrite additional loans to other buyers.
To better ensure that their loans meet the requirements of Fannie Mae and Freddie Mac, lenders gather information in advance of closing not only about the borrower but also about the unit being purchased and the operations of the association that unit is a part of. As you can imagine, lenders don’t want to be “stuck” with a loan because it doesn’t meet the lending requirements; that only reduces the lender’s lending power. Because Fannie Mae and Freddie Mac buy a significant percentage of all mortgage loans sold in the secondary market, lenders take great pains to ensure loans they grant meet Fannie Mae and Freddie Mac lender requirements.
In October, 2021, Fannie Mae announced temporary requirements that impact whether loans secured by units in condominium and co-op projects with five or more attached units are eligible for purchase by Fannie Mae. These requirements become effective January 1, 2022. The new requirements address: (i) significant deferred maintenance and unsafe conditions; (ii) special assessments; and (iii) reserve requirements. Until mid-December, however, Fannie Mae provided little guidance on the implementation of these new lender requirements.
On December 15, 2021, Freddie Mac issued its own temporary requirements very similar to Fannie Mae’s that affect the same type of condominium and co-op projects as Fannie Mae’s requirements. These requirements become effective February 28, 2022.
Note that these new requirements are imposed on mortgage lenders, not associations directly. Unless governing documents or other facts suggest otherwise (which would be rare), associations generally have no obligation to confirm to lenders that the association has no significant deferred maintenance, no unsafe conditions and no planned special assessments. However, the risk of liability must be weighed against the backlash from sellers whose buyers cannot secure funding if the association declines to answer the new questions.
On December 15, 2021, Fannie Mae and Freddie Mac released the joint updated Condominium Project Questionnaire, adding a new Addendum to the Questionnaire to gather information required under the new lender requirements.
Questions included in that Addendum include the following:
- When was the last building inspection by a licensed architect, licensed engineer, or any other building inspector?
- Did the last inspection have any findings related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?
- If yes, have the recommended repairs/replacements been repaired?
- Has the HOA/Cooperative Corporation had a reserve study completed on the project within the past three years?
- Are there any current or planned special assessments owners/shareholders are obligated to pay?
- If yes, what is the purpose of the special assessment?
- What is the total current reserve account balance?
While the answers to some of the questions are straightforward, it is critical that associations carefully consider the answers they provide. Since an inaccurate answer—regardless of whether the error was intentional or unintentional—could open the association to liability, associations should consult with legal counsel and their management company (if applicable) to ensure the information provided is as accurate as possible.
Keep in mind that these lender requirements apply only to condominiums and cooperatives with five or more attached units. Townhome and traditional single family home associations are not subject to these new requirements. However, remember that some communities are designed to resemble townhome-style homes such as row houses, but are legally created as condominiums. The governing documents for an association can clarify whether a community is legally a condominium or townhome (sometimes called a “planned community”).
If you have questions regarding the new lender requirements, or any other questions or issues related to community association, please feel free to contact Nancy Polomis at npolomis@hjlawfirm.com or (952) 746-2105.