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How Tragedy Is Transforming Condo Project Reviews

The collapse of the Champlain Towers has forever changed the condominium market.

Lisa Geloso
Lisa Geloso
Transforming Condo Project Reviews

Henry Ford once said, “the only mistake is the one from which we learn nothing.” To be sure, there are tons of mistakes that happen in the housing industry that are worth learning from, but few lessons have been as painful as the ones following the tragedy that took place in Surfside, Fla. last year.

The collapse of the Champlain Towers and the loss of 98 lives has forever changed the condominium market. There have been few larger examples of this fact than Fannie Mae and Freddie Mac’s new guidance for financing condo and co-op properties, which will have a huge impact on the mortgage industry.

In particular, the new guidelines will significantly alter condo project reviews, which are going to be infinitely more complex and labor-intensive than before. Fortunately, there are things lenders can do to prepare.

Following Up on Fannie Mae and Freddie Mac Guidance

The new GSE guidance offers a lot for lenders to chew on, starting with determining which condo projects are even available for financing. For example, before lenders can do anything on a Fannie Mae loan, they need to check Fannie Mae’s Condo Project Manager to see if the property the borrower wants to buy is actually available for financing. If it’s on Fannie’s new “unavailable” list, the answer is no.

Fannie Mae also requires a questionnaire that lenders need to fill out that creates multiple challenges for lenders, appraisers, and homeowner associations (HOAs), since some require responses that could open up liability issues for HOAs that they aren’t prepared to deal with. In addition, the GSE is requiring all condo and co-op projects, whether they are new or existing, to have a 10% line-item reserve in their operating budget, which many do not.

The guidance from Freddie Mac largely follows Fannie Mae’s. However, Freddie Mac is not changing reserve requirements for any project review types. According to its bulletin of Dec. 15, 2021, Freddie Mac will allow sellers to continue to rely on a working capital fund for new condominium projects or a reserve study for both established and new condominium projects when the project’s budget provides less than 10% replacement reserves.

Under the guidance from both GSEs, however, the largest impact on lenders will be the amount of time, effort, and resources they’ll need to devote on project reviews, which will include much more documentation about condo or co-op developments than ever. In fact, it’s this change that’s likely to cause lenders the most trouble.

Prior to new GSE guidance, depending on the review type, the recommended documents needed to review a project were the typical documents, such as the projects legal documents, financials, appraisal, and questionnaires.

Now, however, lenders will need to determine if a project has any significant deferred maintenance or received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions. When this is disclosed, lenders must now document any and all inspection reports, recent repairs and improvements, deferred maintenance, special assessments, and whether the project has the proper reserves in place to maintain the safety and habitability of the units.

What’s Been Happening

To put it bluntly, these guidelines dropped like a bomb on the industry. We were in communication with Fannie Mae before they came out and had discussed how the GSE was going to look at things like reserve studies. But even we didn’t expect the depth and breadth of these guideline changes.

The reality is there has been a growing level of apathy among condo and co-op HOAs when it comes to making necessary repairs to their properties. In that sense, Fannie Mae and Freddie Mac are doing the right thing by basically requiring lenders to vet these developments more deeply to ensure they are structurally safe and there’s enough capital available to make necessary repairs.

Our hope is that new GSE guidance changes the industry in a good way. But they are already proving tough to deal with. For instance, within two weeks after the new Fannie Mae guidance came out, more than 900 properties were showing up as unavailable for financing on Condo Project Manager. That number has escalated quickly in the three months since.

Lenders need to explore these projects with a completely different lens than before. For example, one of the most important elements of Fannie Mae’s new guidance is the special assessment review. If a project has special assessments in place, a lender needs to request and review any documents related to them to find out what they are for and if they reveal structural or habitability issues down the road. Some lenders have already been doing this, but for many, this will be a completely new process.

Fannie Mae has also suspended the ability to use reserve studies to approve new construction projects or existing developments. In the past, lenders could use the reserve study to show a project had significant reserves in place to handle maintenance and repairs. In fact, every lender we talk to uses them. But the new 10% requirement is typically much more than a new condo development requires since it’s unlikely that a building is going to have a structural failure in the near future. At the same time, we see a lot of existing developments that have large reserve accounts that don’t want or need to have 10% for reserves.

Because of the sheer amount of paperwork being requested, many lenders are turning to third parties for assistance. It’s also worthwhile to note that there may be changes to GSE guidance as well, since both are temporary.

We’ve heard that some large lending groups have been pushing back on some of these requirements, either because they don’t make sense, or they will be too impractical to implement. We’re hopeful Fannie and Freddie take this feedback into consideration, but in the meantime, there are things lenders can and should be doing when looking at getting condo and co-op properties financed.

What Can Lenders Do?

More important than getting financing for any specific condo or co-op project, lenders should be making sure a tragedy like the Surfside condo collapse never happens again. Lenders can help us get there by following a few basic best practices.

The very first thing is to determine a project’s eligibility through Condo Project Manager not only at the beginning of the origination process, but prior to closing as well. Assuming a project is eligible, they then need to review all appropriate documentation, including, but not limited to, the questionnaire, appraisal, budget, title, HOA meeting minutes if they are available, and violation searches and highlight possible red flags.

The point is to perform a thorough search for any information about construction and deferred maintenance that could possibly have an impact on a building’s safety and habitability. This should include any and all available inspection, engineering, or other certification reports completed within the past five years.

In some cases, lenders may need to exert pressure on HOAs to get the proper documentation and get the questionaries answered appropriately. Some lenders are already using the GSEs’ questionnaires and incorporating them into their own questionnaires that they use, which we highly recommend. Another good recommendation to obtain documentation is to seek out parties with an interest in the transaction such as the real estate agent, seller or unit owner, or buyer, as they may be able to provide documentation.

Beyond research, lenders need to train and align their sales, processing, and underwriting teams on new guidance from the GSEs and create a consistent underwriting policy for financing condo and co-op properties. While Fannie’s guidance doesn’t make room for reserve studies, for example, these documents are still useful for determining deferred maintenance and repair issues, so they should still be taken into account.

The bottom line is that the new GSE guidance will prove to be a challenge for condo and co-op lenders, and they are definitely not perfect. But the idea behind them is sound. No one in the housing industry wants another tragedy to occur. If that means going the extra mile in due diligence, it will be well worth the effort.

This article was originally published in the Mortgage Women Magazine March 2022 issue.
Lisa Geloso
Lisa Geloso

Lisa Geloso, is head of product development & customer success at CondoTek

Published on
Mar 31, 2022
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