In the early morning hours of June 24, 2021, the Champlain Towers South Condominium, a 12-story beachfront condominium in Surfside, Florida, collapsed as people watched in horror. Ninety-eight people died and dozens were injured. Soon afterward it was revealed that the condominium had structural problems that went unaddressed for several years. Its concrete and steel structural supports had severely weakened over time due to water intrusion and corrosion.
In the aftermath, those who manage, insure, finance, and regulate condominiums began putting in place policies that would prevent such a disaster from ever happening again. Among them were Fannie Mae and Freddie Mac, which are government-sponsored entities within the secondary mortgage market. Among their missions is to make affordable housing accessible by guaranteeing and buying mortgage loans made by lenders to purchasers of homes, including condominium units, provided the properties and loans meet certain guidelines. Both Fannie Mae and Freddie Mac recently changed their lending guidelines in the wake of the Surfside condominium tragedy.
Changes to Fannie Mae Guidelines
Fannie Mae’s updated lending guidelines went into effect on January 1, 2022. Fannie Mae Lender Letter (LL-2021-14) states that the new guidelines are necessary to combat aging infrastructure and significant deferred maintenance in condominiums. These guidelines apply to condominiums with five or more units. Loans secured by units in a condominium with significant deferred maintenance or that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions will no longer be eligible for purchase by Fannie Mae. Significant deferred maintenance is defined as any of the following:
- In order to complete repairs a full or partial evacuation of the building for more than seven days or an unknown period of time is necessary
- the condominium has defects or substantial damage that is one of the following:
- severe enough to affect safety, soundness, structural integrity, or habitability
- many major components need substantial repairs, or
- the safe functioning of one or more major structural or mechanical components is impeded
In order to determine if significant deferred maintenance exists, lenders will be looking for several things such as inadequate reserve funding, budget deficits, special assessments, and any association records that document the existence of unsafe conditions. Fannie Mae has indicated that its best practice for lenders is to review the past six months of a condominium association’s meeting minutes for any evidence that the project needs significant maintenance or repairs. Lenders should also review any available inspection, certification, or engineering reports completed within the past five years. In addition, any condominium that contributes less than 10% of its budgeted income to reserve funds will be considered ineligible for a loan. Lastly, if a special assessment has been imposed by the condominium the lender will need documentation to show that it will have no negative impact on the financial stability, viability, condition and marketability of the condominium. If the special assessment is related to the safety, soundness, structural integrity or habitability of the condominium, then all related repairs must be completed before the project will be eligible for a Fannie Mae loan.
Changes to Freddie Mac Guidelines
Similar to Fannie Mae, Freddie Mac updated its lending guidelines on December 15, 2021 (Bulletin 2021-38: Temporary Condominium and Cooperative Project Requirements and Topic 5600 Reorganization – CRC-Single Family Freddie Mac). The guidelines go into effect on February 28, 2022 and apply to projects with five or more attached units. Similar to Fannie Mae’s focus on “significant deferred maintenance,” Freddie Mac focuses on not lending in condominiums that need “significant critical repairs.” Significant critical repairs is defined as repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project or that impact unit values, financial viability or marketability of the project. Similar to Fannie Mae, lenders under Freddie Mac guidelines will also look at the association’s meeting minutes, engineer’s reports, reserve studies, documentation of building code violations, lists of necessary repairs provided by the association or management company, and a review of any special assessments that have been imposed by the association.
Conditions that Will Not Impact Loan Eligibility
Not every defect in a condominium will prevent a prospective unit purchaser from obtaining Fannie Mae or Freddie Mac financing. Routine maintenance or repairs within the condominium’s normal operating budget, repairs that are preventative in nature, or damage or deferred maintenance to one or a few units that does not affect the overall safety, soundness, structural integrity, or habitability of the condominium will not make a condominium ineligible for Fannie Mae or Freddie Mac financing.
Key Takeaways for Condominium Boards
Condominium boards have a duty to maintain their condominiums’ property values. Proper maintenance and making sure that their projects are eligible for secondary financing are important steps in accomplishing this. To that end, boards should do the following:
Keep good records – Lenders will now require a lot more information from the condominium to determine if the project is eligible for Fannie Mae or Freddie Mac financing. Condominium associations should have available their meeting minutes, reserve studies, engineering reports, inspection records, maintenance and repair records, and financial records
Obtain Regular Reserve Studies – Obtaining a reserve study every five years is a good rule of thumb for condominium associations. The engineer performing the reserve study will inspect the condition of the condominium’s components and will provide their remaining useful lives, a schedule for repair and replacement, and recommendations for adequate reserve funding.
Budget Properly – Condominiums should maintain adequate budgets to address maintenance, repairs and replacements. The budget should follow the recommendations in the reserve study for reserve funding. Both Fannie Mae and Freddie Mac require a minimum of 10% of the condominium’s income for reserves. However, any minimum statutory reserve requirements should be followed. Special assessments have the potential to make a project ineligible for financing until repairs are made. Adequate budgeting to avoid the imposition of a special assessment is important.
Perform Regular Maintenance – Perform regular maintenance and repairs to avoid letting the project fall into disrepair.
Provide Accurate Responses on Lending Questionnaires – Lenders will require condominium associations to complete questionnaires to determine if the project is eligible for lending. These questionnaires can be complicated as they now include addenda for information about project conditions. Making significant misrepresentations on the questionnaires may subject the preparer to civil and criminal penalties. If unsure about how to respond the condominium association or manager should consult with an attorney.
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