New GSE Guidelines Challenge Condo/Co-op Lenders

Lenders have a terrible time obtaining up-to-date and accurate info from public data

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Orest Tomaselli

New GSE Guidelines Challenge Condo/Co-op Lenders

It’s not very often that condominium and coop properties make mortgage industry headlines — but there is a very good reason why they are.

In January 2022, Fannie Mae rolled out new temporary guidelines for lending in condo and co-op properties in response to the tragic collapse of the Champlain Towers condominium in Surfside, Florida, that took 98 lives. So far, the new guidelines have had a massive impact on borrowers, lenders, condo and co-op boards.

The focus of these new guidelines is squarely on ensuring that Fannie Mae and Freddie Mac do not lend on properties that are unsafe — and equally important, to ensure that associations have enough capital to repair problems that may exist. While these new guidelines create more transparency into the condition and financial health of condo and co-op properties, they have wreaked havoc on lenders trying to comply with these new directives for lending.

So far, lenders are having a terrible time obtaining up-to-date and accurate information from public data, property managers and board members when vetting properties. For example, before lenders can sell a condo or co-op loan to Fannie Mae, they are required to use Fannie Mae’s new condo questionnaire and addendum, which requires lenders to document a property’s structural and mechanical components, deferred maintenance, and special assessments.

Meanwhile, boards and managers are pushing back hard. Under advice from legal counsel, many are refusing to answer many of the questions about the buildings they represent. When that happens, lenders are forced to either reject the loan or investigate the property on their own. The latter choice takes a lot of time and effort, and there’s no guarantee they’ll be able to close the loan.

To make the GSEs’ new lending guidelines easier to understand, I’ve broken down the requirements into five main categories.

Deferred Maintenance

Fannie Mae and Freddie Mac require lenders to determine whether a property has deferred maintenance, and if so, what possible impact it may have on the habitability and financial health of a development. Obviously, not making needed repairs could create long-term problems, from higher repair costs to the kind of disaster that occurred in Surfside. The big question is, “What do Fannie and Freddie consider deferred maintenance?”

The GSEs define “significant deferred maintenance” as maintenance that may impact a unit’s safety and soundness or its marketability or impact to the financial stability or physical safety of the overall development. Examples may include “full or partial evacuation of the building to complete repairs as required for more than seven days,” or improvements that involve “many major components,” or improvements that impede the functioning of a building’s foundation, roof, electrical system, plumbing or HVAC. It can also include developments that don’t have an acceptable certificate of occupancy or were unable to pass local regulatory inspections.

The Unavailable List

Fannie Mae has also created an “unavailable” list of condominium and cooperative properties that do not meet one or more of the newly issued guidelines. Once Fannie Mae has been made aware that a property does not meet its new lending guidelines, the property is added to this “unavailable” list and mortgage financing is no longer available. Being added to the “unavailable” list creates additional issues, too, such as limited access for borrowers to non-Fannie/Freddie loan products, the borrower not being able to access lines of credit, and most importantly, decreased unit value.

The 10% Reserve Requirement

Fannie Mae’s newest guideline change has an increased focus on requiring condo and co-op boards to maintain a 10% reserve line item for future maintenance. Although this requirement has been in place for years, the 10% reserve line-item has often been left out of condo and co-op budgets so unit owners could enjoy lower monthly common charges. Some condo and co-op boards have flat-out refused to add the reserve line item to their operating budget.

Fannie Mae has also removed the ability for lenders to use a development’s reserve study to get around the 10% reserve line item. This means lenders are now forced to analyze properties based only on their compliance without factoring in how much capital they’ve amassed. The only way around the Fannie Mae rule is to submit the entire condo or co-op project for Project Eligibility Review Service (PERS) review and approval.

Freddie Mac seems to be more reasonable on this issue, as the agency still accepts a reserve study to outline appropriate and accurate reserve funding in lieu of the 10% reserve line item.

Special Assessments

Special assessments are typically used to pay for unforeseen expenses on a condo or co-op property. Although lending guidelines haven’t changed very much regarding special assessments, when coupled with the new Fannie/Freddie lending guidelines, they can stop a condo property from obtaining lending approval. Both agencies are primarily concerned that the special assessment isn’t tied to a deferred maintenance item and if it is, that the components that warranted the special assessment were in fact replaced.

Questionnaire Addendum

Fannie Mae’s new condo questionnaire addendum asks several additional questions regarding building safety, soundness, structural integrity, habitability, deferred maintenance, and special assessments. So far, most condo and co-op managers and attorneys have called these questions an overreach, as boards want to avoid attesting to the structural condition of the property. As a result, the questions are creating significant delays—but because they are required for both Fannie Mae’s limited and full reviews, there’s no way of getting around it.

Suffice to say, the GSEs’ new guidelines have dramatically changed the landscape for condo and co-op lending and are forcing lenders to be the new gatekeepers — a role no lender appreciates. Fortunately, there is help available to lenders who want to continue lending on condo and co-op properties and do the right thing. There’s also the likelihood that the GSEs’ new guidelines may be adjusted in the future to reduce some of their more frustrating aspects for lenders.

At the end of the day, however, it’s hard to argue with the spirit of the new guidelines, especially after last year’s tragedy. If it saves lives by preventing another catastrophe, then they may be well worth it.