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
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.
