FNMA UPDATE
It has been almost four months since the tragedy in Surfside, Florida. During that time, associations, managers, accountants, lawyers, insurance advisors and other industry professionals have been working to take steps to ensure (to the extent possible) that a tragedy of this magnitude never happens again. However, there is one other organization which has been working to offer protection, not to current owners, but to future owners.
On October 13, Fannie Mae, (“FNMA”) issued a Lender Letter which has temporarily revised the requirement for lenders to use in determining whether or not loans secured by condominium units will be eligible for FNMA to purchase. On the information we currently have, the issue of deferred maintenance will be front and center in FNMA’s determinations.
While the revisions have made changes to lender requirements for review of reserves and documenting appraisals, the one that is of utmost importance to condominiums is focused on special assessments because deferred maintenance frequently results in special assessments. Loans secured by mortgages on units in condominiums which have either passed or are planning to pass a special assessment to address structural integrity or habitability of units may be subject to stricter eligibility review requirements than those currently used. Associations which have received a “repair directive from a local regulatory authority or inspection agency to make repairs due to unsafe conditions” will find that FNMA will not be purchasing mortgages for units in their condominiums until the conditions that led to the directives have been completed in such a manner that “resolves the building’s safety, soundness, structural integrity, or habitability concerns.” (FNMA Lender Letter 2021-14) The good news is that the new requirements are not expected to apply to routine maintenance which maintains the integrity of the property. Similarly, if the damage or deferred maintenance is only affecting one or a few units which are not the security for the loan, the new requirements probably will not apply.
An additional change is that the use of a reserve study in lieu of the FNMA 10% reserve requirement has been eliminated. While there is a process for an exception in established projects that have a reserve study which demonstrates sufficient reserves, requests for exceptions for new project will not be considered.
Lenders will be asking for six months of meeting minutes to determine if there has been discussion of maintenance or construction issues that may lead to special assessments. FNMA is also “recommending” that lenders review inspection or engineering reports completed within five years prior to the mortgage loan in order to determine if there are issues of deferred maintenance.
FNMA has not published its new Condominium Questionnaire but we anticipate that there will be additional information which must be provided for buyers to obtain a loan. However, what is clear is that associations which have been deferring maintenance or proceeding under a “band aid” approach will find themselves suffering a decline in the marketability of their units.
We will continue to update you with additional information as we receive it. Given that these changes go into effect January 1, 2022, now is an excellent time to review budgets and consult with industry professionals so that owners who are selling their units will be able to obtain the highest sale price possible, rather than face a failed sale because a buyer cannot obtain a loan due to deferred maintenance. Surfside has proven, and FNMA is acknowledging, that deferring maintenance by kicking the can down the road is not acceptable.
For Lender Letter (LL-2021-14) click [here].