Significant New Fannie Mae and Freddie Mac Lender Requirements

 Ryan R. Severance

In September, the Fannie Mae and Freddie Mac condominium and cooperative project eligibility standards were updated. Fannie Mae, otherwise known as the Federal National Mortgage Association, and

Freddie Mac, otherwise known as the Federal Home Loan Mortgage Corporation, are government-created entities that buy mortgages on the secondary market and back others, including mortgages granted by private lending institutions large and small. As a result, Fannie Mae and Freddie Mac have a considerable influence over the national mortgage lending market. Importantly for condominiums and cooperatives, they require a project eligibility review in order to approve unit mortgages for their programs. This project eligibility review, which is only for condominiums and cooperatives with five or more units, covers a wide range of subjects: ownership structure and composition, reserve funds, litigation, insurance, and – importantly and the subject of the changed standards – the repair status of any condominium or cooperative building.

The repair status of condominium and cooperative buildings found itself in the spotlight after the tragic collapse of the Champlain South Tower in Surfside, Florida in June 2021. In January 2022, in response to that tragedy, Fannie Mae and Freddie Mac issued temporary revised project eligibility requirements as to projects with potentially unsafe conditions.  Fannie Mae and Freddie Mac have now finalized their project eligibility requirements as to the condition of condominiums and cooperative buildings (See Fannie Mae Selling Guide Announcement SEL-2023-06: here (https://singlefamily.fanniemae.com/media/36376/display and Freddie Mac Guide Bulletin 2023-15: here (https://guide.freddiemac.com/app/guide/bulletin/2023-15).

These updated and clarified standards for eligibility of condominium and cooperative buildings include the difference between critical repairs and routine repairs, the role special assessments play in review of maintenance concerns, the role of any inspections and reports received, and the documentation that lenders may need to collect to confirm maintenance status. While these finalized requirements are not dramatically different than the previous temporary requirements, they do provide additional context beyond those of the temporary requirements as to what lenders will be seeking as they review mortgagee questionnaires for eligibility. For that reason, in addition to the continued requirement that board members act to properly maintain, repair, and replace their project elements, boards and property managers will need to be sure to provide appropriate information on those mortgagee questionnaires, to ensure their condominium or cooperative project remains eligible for loans to be bought or backed by Fannie Mae and Freddie Mac.

The Importance of Eligibility

Eligibility is important for a condominium or cooperative to maintain. In the event that a condominium or cooperative is deemed to be “ineligible,” loans on its units will be rendered ineligible for purchase or securitization by Fannie Mae and Freddie Mac. Practically, this will mean that unit owners and prospective unit purchasers will not have the same number of options for banks at which to obtain or refinance mortgages. While some small lenders may continue to lend despite eligibility concerns, most lenders will be unable to do so. For this reason, unit owners who are selling their units may find sales terminated due to the inability of prospective buyers to obtain mortgages from their preferred lender or may find that they cannot refinance with their chosen lender. For these reasons, the concept of Fannie Mae and Freddie Mac eligibility is important for the marketability and value of a condominium or cooperative project’s units.

Routine Repairs versus Critical Repairs

With the updated lender requirements, Fannie Mae and Freddie Mac have provided a definition of routine repairs versus critical repairs that are performed to project elements. Examples of elements that Fannie Mae and Freddie Mac are concerned about are “sea walls, elevators, waterproofing, stairwells, balconies, foundation, electrical systems, parking structures or other load-bearing structures.”

“Routine repairs” are defined by Fannie Mae and Freddie Mac as those that are not considered critical and include work that is:

·       preventative in nature or part of normal capital replacements (for example, focused on keeping the project fully functioning and serviceable); and

 

·       accomplished within the project’s normal operating budget or through special assessments that are within guidelines.

“Critical repairs” are defined as those “repairs or replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building, or the financial viability or marketability of the project.” These critical repairs include, but are not limited to:

1.   Material deficiencies, which, if left uncorrected, have the potential to result in, or contribute to, critical element or system failure within one year;

 

2.   Any mold, water intrusions, or potentially damaging leaks to the project’s building(s);

 

3.   Advanced physical deterioration;

 

4.   Any project that failed to pass state, county, or other jurisdictional mandatory inspections or certifications specific to structural safety, soundness, and habitability; or

 

5.   Any unfunded repair of more than $10,000 per unit that should be undertaken within the next 12 months (this does not include repairs made by the unit owner or repairs funded through a special assessment).

While these definitions are helpful, the interpretation of any repair will be up to the lender representative reviewing the information provided on a mortgagee questionnaire.

In addition, there is a carve out for deferred maintenance or damage that is “isolated to one or a few units that does not affect the safety, soundness, structural integrity, or habitability of the project.”

Special Assessments

Fannie Mae and Freddie Mac have also updated their requirements for eligibility based on the review of special assessment records. Boards and property managers will now be expected to provide extensive records of special assessments to lenders to ensure eligibility of the condominium or cooperative project, regardless of whether the special assessment is planned or currently being collected. Lenders are expected to collect the following information:

1.   The purpose of the special assessment;

 

2.   The date the special assessment was approved;

 

3.   Whether the special assessment is planned or being collected;

 

4.   The amount of the special assessment and how much remains to be collected; and

 

5.   The expected date that the special assessment will be paid in full.

Any special assessment associated with a critical repair, which has not yet remediated the critical repair issue, will deem the condominium or cooperative project ineligible. It is important for boards and property managers to provide complete information as to special assessments to lender representatives to maintain eligibility.

Inspection Reports

The eligibility standards have also been updated to specify in more detail the inspection records that boards and property managers will need to provide, which includes any structural or mechanical inspection report or reports related to the condominium or cooperative project provided by any vendor, federal, state, or local authority within the last three years prior to the review date. Any statement in such records that indicates that critical repairs are needed, an evacuation order is in effect, and/or regulatory action is required will deem a condominium or cooperative project to be ineligible. If any report states that critical repairs are needed, the project will be deemed ineligible until such time as an engineer’s report or “substantially similar document” confirms that the concerns have been resolved. Unfortunately, Fannie Mae and Freddie Mac have not offered any further definition of what “inspection report” means and, thus, board members and property managers will need to engage in a case-by-case review of any form or information received from vendors, federal, state, or local authorities to confirm whether it qualifies as a “structural or mechanical inspection report.”

Documentation Requirements

Fannie Mae and Freddie Mac now have more expansive documentation requirements for lenders to review in order to confirm that condominium or cooperative project conditions do not require critical repairs. The documentation requirement is relatively open ended, which may result in lender representatives seeking documentation well beyond what has traditionally been expected. Fannie Mae and Freddie Mac guidelines provide the following examples of documentation that boards and property managers should be prepared to provide:

1.   Board meeting minutes;

 

2.   Engineer reports;

 

3.   Structural and/or mechanical inspection reports;

 

4.   Reserve studies;

 

5.   A list of necessary repairs provided by the board or its management company; and/or

 

6.   A list of special assessments provided by the board or its management company.

To any extent that a lender is requesting documentation that may be unreasonable or – most importantly – protected by privilege, boards and property managers should seek counsel.

Approach to the New Requirements

We would expect mortgagee questionnaires to be updated by lenders in the face of these new requirements. There is rarely a singular approach to completing all lender questionnaires, and each questionnaire will likely need to be reviewed on a case-by-case basis. This is particularly the case where lender representatives are given some leeway as to the materials to review to determine eligibility under the new guidelines. Most importantly, as boards and property managers review updated mortgagee questionnaires in light of these new requirements, they should consult with experienced condominium counsel to craft the appropriate response as to critical repairs. We expect to work closely with boards and property managers as lenders revise their form mortgagee questionnaires and may have further updates as we see additional issues raised.

An associate in the real estate department of Moriarty Bielan & Malloy LLC, Ryan’s practice focusses on the general representation of condominium associations, including condominium document interpretation, drafting, enforcement, and collections. Ryan’e email address at MBM is rseverance@mbmllc.com.

 

New and Future Changes to the Boston Zoning Code and the Boston Planning and Development Agency

Michel L. Wigney

The Boston Zoning Code (“Code”) is nearly 4,000 pages long, includes 429 separate zoning districts, and has been amended over

the decades by adopting “articles” that are generally tacked onto the Code as a whole, rather than revising specific sections within the Code itself. With such a system, it is perhaps not a surprise that 42% of parcels within the City of Boston are deemed “nonconforming” regarding lot-size requirements, to say nothing of nonconformities with respect to other criteria, the proliferation of variances, and the availability of waivers from the Zoning Board of Appeal.

To describe the Code as “unwieldy” is an understatement. As a result, the Boston Planning & Development Agency (“BPDA”), the agency charged with administering, applying, and enforcing zoning within the city, commissioned a comprehensive assessment of the current Code, including recommendations for improvements and reforms (“Report”). The Report was released by the City in September. It is authored by Cornell University professor Sara C. Bronin, who is also the Director of the National Zoning Atlas.

Bronin’s critiques of the current Code are significant and comprise approximately half of the Report. The complexity of the current version of the Code can at least, in part, be attributed to the fact that fifteen of Boston’s twenty-six neighborhoods were once separate towns, or neighborhoods of separate towns. Regardless of the reason for the Code’s current complexity, the Report makes a series of recommendations for improvement that are likely more relevant to Boston’s residents and professionals because the BPDA has commenced partial implementation.

The Report includes two overarching recommendations and a number of more specific suggestions that fall within two main categories. The two primary changes recommended to be made in an updated version of the Code, according to the Report, are:

·       Boston needs to dispense with neighborhood-specific zoning and planning in favor of a City-wide vision.

 

·       The Code must be shortened and simplified to streamline, clarify, and equalize development and redevelopment requirements and processes.

The Report notes that “in 2017, the city adopted its first citywide plan in 50 years, Imagine Boston 2030” but that it seems to have gained very little traction and been given little “regulatory heft,” which may be indicative of the city’s ambivalence to comprehensive planning generally. Report, pp. 19-20.

In addition to these two broad measures, the Report details more targeted actions, which it asserts will have a significant impact on Boston zoning and promote the city’s goals. These include:

·       Synthesizing the Neighborhood Plans that have been the mainstay of city planning into a single, cohesive planning document for the entire City.

·       Limiting the Code to 500 pages.

·       Capping the number of zoning districts within the city at 50.

·       Adopting “Form-Based Zoning” that focuses on building design, shape, scale, spacing, orientation on the lot, and similar features, with the use-based regulations of traditional zoning being incorporated but not predominating.

·       Facilitating housing development – especially multi-family housing – by establishing as-of-right pathways for housing principal uses, enabling dense housing around squares and transit hubs, and legalizing accessory dwelling units.

·       Accelerating economic growth by increasing zoning areas for small businesses, promoting mixed-use developments within hubs and corridors, and allowing more diverse uses within industrial zones (while maintaining the industrial uses themselves).

·       Accounting for climate change by increasing tree plantings and green roofs to address extreme heat, reducing greenhouse gas emissions via dense development around transit hubs, considering a moratorium on development in areas deemed at severe risk from sea-level rise, and reducing vehicle reliance by eliminating minimum parking requirements.

Implementation of these suggestions would constitute a dramatic shift in the current paradigm. The varied and numerous critics of the current Code, including Boston Mayor Michelle Wu, might say that this is not necessarily a bad thing. The benefits, according to the Report, would be numerous. The Code would become more understandable, more accessible, require less time and fewer City resources for implementation, decrease barriers to entry, increase equity and diversity in development, increase conformity and compliance, and improve control while maintaining flexibility.

Some of these changes are already taking place.

The BPDA Planning Department – one of 13 different departments – now includes a Zoning Compliance team that will reduce exceptions to the Code by supporting “planning-led development”. The Planning Department has also renamed and restructured existing teams to create a Comprehensive Planning team, which will focus on long-term, citywide goals, and a Zoning Reform team, which will proactively amend and revise the Code.

These teams will be launching the BPDA’s next major initiative “Squares & Streets”, a program that will analyze specific hubs and corridors within the City and develop Small Area Plans specific and personalized to each area. This appears to be an effort to incorporate the Report’s recommendations that dense housing and mixed-use developments be constructed in existing popular or high-traffic areas with access to public and/or rapid transit to address housing needs and decrease vehicle reliance. The BPDA has hosted, or is planning to host, Squares & Streets pop-up events in Dorchester, South Boston, Mission Hill, Hyde Park, and Nubian Square.

The BPDA seems to be taking the findings of the Report to heart, though Chief of Planning Arthur Jemison notes that protecting “the ability for neighborhoods to maintain their unique character” will remain a consideration.

The changes so far begin to incorporate the actions suggested in the Report, and the primary purpose, at this stage, appears to be to allow development of additional multi-family housing to address the severe housing need in the city. For many, this is a promising start. It will, however, take time for such an overhaul to be completed and, until that process is finished, the current regulations and procedures remain in effect.

Here is a link to the report, Reforming the Boston Zoning Code, by Sara C. Bronin https://www.bostonplans.org/getattachment/a4c0dc15-bad1-4e6c-83b1-59f216a86b48

An associate in the real estate, zoning and land use, and litigation departments of the Boston and Quincy based firm of Moriarty Bielan & Malloy LLC, Michel’s practice focuses primarily on real estate development and associated work such as permitting, environmental document review, zoning compliance, and conveyancing. She has represented a variety of clients, including individuals, small businesses, large-scale corporations, and federally recognized Indian tribes. Michelle’s email address is mwigney@mbmllc.com.

 

What Happens When Too Much Interest Is Charged on a Loan?

Jonathon D. Friedmann

In today’s hard economic environment, it is often hard for borrowers to obtain conventional loans from a lender. As a result, it is often

necessary for borrowers to turn to less conventional lenders, sometimes referred to as hard-money lenders. The non-traditional lenders often times charge interest rates much higher than that of a traditional lender and often times at rates that implicate the Anti-Usury Statute, M.G. L c.271, §49. One would think that a violation of the Anti-Usury Statute would also be a violation of Chapter 93A, the Consumer Protection Act. However, as found by the Court in Robert Germinara v. The People’s Comprehensive Mortgage, 98 Mass.App.Ct. 1117),.a violation of the Anti-Usury Statute is not necessarily a violation of Chapter 93A, Section 11.

 

In Germinara, the lender admitted that it had violated the Anti-Usury Statute by charging an interest rate in excess of the maximum rate permissible by law without having registered with the Attorney General’s Office. A lender who registers with the AG’s Office may charge rates in excess of the statutory maximum set by the Anti-Usury Statute. The Court determined that the appropriate remedy in this instance was not voiding of the loan but was instead reformation. The Court ordered the interest rate to be reset at 18%. It should be noted that a violation of the Anti-Usury Statute does not mandate a voiding of a loan. Rather, the statute gives a judge discretion, based upon all the facts and circumstances surrounding the loan, to void it, to rescind it, to refund, to credit any excessive interest paid, to reform the contract, or to provide any other relief consistent with equitable principle. The Court will look to the integrity of the loan to determine what remedy is appropriate.

 

In the Germinara case, the lender previously had been registered with the Attorney General’s Office so as to permit it to make loans that would otherwise be usurious. Just prior to making the loan, the attorney representing the lender died. Between the date of death of the attorney and the date of death of the loan, the registration with the AG’s Office, which is valid for two years, had expired without renewal. Accordingly, at the time the loan was made, the registration had expired, and the loan was therefore usurious. The Court ultimately found that the lender, when negotiating and setting the terms of the loan, did not engage in misconduct. The Court also found that the borrower was a sophisticated business person with highly competent counsel and that the borrower understood and appreciated the obligations he was undertaking when executing the loan documents.

 

The Court noted that the loan was a high-risk loan from a lender’s perspective and the promissory note expressly provided for reformation as the remedy if the interest rate was found to be usurious. Finally, the judge observed that there were no recurring violations of the Anti-Usury Statute; rather, that the violation resulted from a one-time, relatively small payment of closing costs and points. What this tells us is that for sophisticated business people borrowing money at high interest rates because conventional lending is unavailable in today’s market, this is an avenue of obtaining loans and the usurious loans may be enforced. So, should you need a usurious loan utilizing non-traditional lenders as a mechanism for funding a business or business ventures, it’s always risky due to the very nature of the loans. However, these loans may be appropriate in unique circumstances. If you intend to use this method to fund your business operation, it is suggested that you proceed with caution and research the lender thoroughly to determine if the lender is registered with the AG’s Office. In addition, find out from the AG’s Office the lender’s history of compliance making usurious loans. Ultimately, the decision to utilize a high-interest loan becomes business decision based upon the necessity for money and the funding sources available. We always recommend that a borrower, whether seeking a traditional loan or a non-traditional loan, proceed with caution as these loan obligations are likely to be found enforceable by the Courts.

A founding partner of Rudolph Friedmann LLP and chairman of the firm’s litigation practice, Jon litigates a great many matters in state and federal courts throughout the United States. He was trial counsel for the prevailing party, People’s Comprehensive Mortgage, and successfully defended the judgment in favor of People’s Comprehensive Mortgage against Germinara on appeal. Jon’s email address is jfriedmann@rflawyers.com.

Missteps to Avoid When Retitling Investment Property

 Brian A. Lynch, Esq.

Most astute entrepreneurs will avoid running a business as a sole proprietor or as part of a partnership and opt to limit their personal

liability by forming a separate entity to operate the business. A corporation or a limited liability company (“LLC”) are often the best vehicles to shield the business owner’s personal assets from claims that arise against the business. The same strategy can be implemented for real estate that is owned as rental property. Acting as a landlord is best viewed as being a business and a landlord should take the appropriate steps to shield their personal assets from any claims that arise in relation to the rental property.

Forming a corporation or an LLC in conjunction with the acquisition of an investment property to hold title is a good strategy to shield the landlord’s personal assets. For landlords that have already purchased rental property in their individual name, it is still possible to transfer the property to a corporation or an LLC. Although the process can be completed by simply recording a deed from the current owner to a registered company, careful consideration should be taken to avoid potential pitfalls or missteps in the process. If the landlord has an outstanding mortgage encumbering the property, the process of recording a new deed may violate the terms of the mortgage and allow the lender to require the entire loan to be repaid within 30 days. Additionally, if the landlord has a title insurance policy, the process of transferring the property to the separate entity may void the policy. Hazard or liability insurance policies will also need to be addressed to make sure the appropriate party is covered. Existing lease agreements should be reviewed to confirm any transfer to a business entity is effective or permissible under the lease.

Some landlords may utilize a realty trust, also known as a nominee trust to hold title to avoid having to undergo probate to pass the property to the landlord’s heirs. Realty trusts are effective in avoiding probate, but unlike a corporation or an LLC, a realty trust does not shield the landlord’s personal assets. To achieve the dual goal of shielding personal assets and avoiding probate, a landlord may desire to retitle the rental property under a corporation or an LLC that is owned by the landlord’s estate planning trust. This dual strategy can not only be utilized for investment properties but can also be used for other business interests such as shares of a corporation or membership in an LLC. By transferring the shares or LLC membership to a trust, the business can be passed to the business owner’s heirs without the need of probate. Business owners of a business that is taxed under the Internal Revenue Service’s Subchapter S, a so called “S-Corporation,” must be mindful that only certain types of trusts can be shareholders of an S-Corporation under the tax code. 

Retitling investment property or a person’s ownership interest in a business should be done with care. Attorneys can guide landlords or business owners through the process to ensure their goals are achieved and assets are protected.

An associate in the Boston firm of Rudolph Friedmann LLP, Brian enjoys assisting entrepreneurs and business owners grow their vision from the ground up. He provides legal guidance on entity formation, corporate governance, contract drafting and negotiations, business sales and acquisitions, and general commercial transactions. Brian’s email address is blynch@rflawyers.com.

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Insurers, Issues and Indemnification: The New Cost of Delayed Reimbursement

Casey Sack

Massachusetts General Law Chapters 93A and 176D, long a compelling and formidable mechanism for consumers, has been extended beyond its usual

confines to become a further source of consternation in the insurance industry. The Consumer Protection Act and the Unfair Methods of Competition and Unfair and Deceptive Acts and Practices in the Business of Insurance are dual sides of the same coin, often acting as the other’s counterpart when allegations of deceptive practices arise in the context of trade. A recent ruling by the Massachusetts Appeals Court affirms the influence of these two laws.

 

An employee for a subcontractor sustained injuries in a fall on a project site and sued the general contractor of the project for negligence. The insurance carrier of the general contractor agreed to indemnify the general contractor subject to a reservation of rights that included reimbursement of defense costs in the litigation. Instead, however, the insurance carrier waited eight months before paying any of the general contractor’s defense costs and only did so after the general contractor sued the insurance carrier for breach of contract, as well as violations of Chapter 93A and Chapter 176D.

 

The trial court found that the insurance carrier fulfilled its contractual obligations by acknowledging its obligations to pay defense costs at the outset of the litigation. The Appeals Court, however, disagreed. It determined that an unnecessary and unreasonable delay in payment can constitute a violation of both Chapters 93A and 176D. Although the Court refused to define unreasonable delay, the delay of seven months in this litigation was long enough for the insurance carrier to be liable for any penalties imposed by Chapters 93A and 176D.

 

The decision serves as a serious warning to insurance carriers that delay reimbursement as courts may find that the insured may still have damages, even if the legal fees are eventually paid, because it may alter the manner in which an insured defends a litigation. Certainly, the threat of suffering the penalties of Chapters 93A and 176D may be enough to limit the number of disputes between insurance carriers and their insured.

 

Casey Sack is an Associate in the Boston law firm of Rudolph Friedmann LLP focusing her practice on all aspects of commercial litigation.  She can be contacted by email at csack@rflawyers.com .

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