Over the past few years, there have been significant changes to lender requirements for condominium and homeowners association (HOA) loans. This evolution in condo loan requirements stems from a mix of regulatory interest, financial challenges facing older communities, and the need for transparency and safety in the real estate sector. In light of these dynamics, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) this month released fresh updates in condominium seller guidelines.
What Prompted the Condo Loan Requirements Update
The tragic Champlain Towers South Condominium collapse in June 2021 killed 98 people. This prompted Fannie Mae and Freddie Mac to introduce temporary project review requirements. These were aimed at evaluating the financial and structural health of condominiums, co-ops, and similar properties, especially concerning significant deferred maintenance. The summarized requirements included:
- Prohibition of sale for condo and co-op loans in projects with current evacuation orders due to unsafe conditions.
- Mandatory review of all structural or mechanical inspection reports completed within 3 years of the project review date.
- New requirements are set for condo or co-op projects with special assessments.
- Prohibition of sale for condo and co-op loans in projects with unfunded repairs over $10,000 per unit.
- Prohibition of sale for condo and co-op loans in projects with an “Unavailable” status in Condo Project Manager (CPM), Fannie Mae’s web-based tool that helps lenders determine if a project meets their eligibility requirements.
- Loans for units in projects requiring critical repairs or with unresolved significant deferred maintenance won’t be eligible for sale to Fannie Mae until required repairs are made.
RISE previously wrote about the changing Fannie Mae condo loan requirements and implications for condo boards.
2023 Updates on Condo Seller Guidelines and Condo Loan Requirements
The Federal Housing Finance Agency (FHFA) has now directed Fannie Mae and Freddie Mac to move from temporary measures to permanent guidelines concerning loan eligibility for condominium units. The main focus is to help lenders identify projects with potential safety concerns and to promote sustainable homeownership.
Details of the New Guidelines
- These replace the provisional guidelines from 2021.
- The guidelines apply to condo loans in co-op projects having five or more attached units.
- Some projects, notably older ones that face financial challenges regarding future upgrades, might be rendered ineligible.
Key Definitions
Terms within the guidelines of particular importance to condo boards include:
- Critical Repairs: Significant repairs affecting the safety, value, and habitability of units, e.g., sea walls, foundational elements, and electrical systems.
- Routine Repairs: Regular, non-critical maintenance within a project’s budget.
- Material Deficiencies: Physical issues impacting a property’s structural integrity.
- Significant Deferred Maintenance: Issues that could necessitate evacuating a building or drastically impede its function.
Implications of Updated Condo Loan Requirements for Stakeholders
The updated condo loan requirements will directly impact condo boards and homeowners, of course, and will extend to lenders, real estate agents, and developers. The guidelines influence the eligibility and financing options for condo purchases, with a ripple effect through the entire real estate market.
- Financial Health is Crucial: A project’s financial health is paramount. Associations must adopt forward-looking financial plans, which should include well-structured reserve studies and funding schedules.
- Emphasis on Property Condition: Associations need to prioritize maintenance and handle critical repairs without delay. Regular inspections and immediate responses are essential.
- Insurance: Proper insurance is crucial. Full-replacement value policies are emphasized, and associations must review and upgrade their insurance covers accordingly.
- Litigation and Disputes: The nature of ongoing litigation or disputes matters. Associations should aim to resolve issues amicably, especially those concerning the building’s structural and functional features.
- Role of Lenders: Mortgage lenders might implement these guidelines earlier than the official date. Constant communication between associations and lenders is, therefore, vital.
Other Important Notes For Condo Boards
Condo boards will ignore Fannie Mae and Freddie Mac financing at their own peril. As of 2023, Fannie Mae and Freddie Mac support roughly 70% of the mortgage market, per the National Association of Realtors. More important items to note about the 2023 update on Fannie Mae/Freddie Mac seller guidelines and condo loan requirements:
- Effective Date: The new guidelines have been in effect since September 18, 2023.
- Impact on Condominium Associations: The main focus is on lenders, but condominium associations need to be updated. Lenders will inspect all relevant reports from the last three years, and complexes with unfunded repairs exceeding $10,000 per unit will not be eligible for loans. Proper documentation is essential for loan eligibility assessments.
- Form 1076: This form is also known as the Condominium Project Questionnaire and it remains unchanged, aiming to clarify expectations. Although it’s not compulsory for condominium associations to fill this out, any misinformation can result in ineligibility and potential legal implications. Form 1076 is available from Fannie Mae here
Closing Thoughts
The updated requirements by Fannie Mae and Freddie Mac emphasize the importance of both the financial and physical health of condominiums and housing cooperatives. This shift in focus is designed to foster more diligence, transparency, and, ultimately, sustainable homeownership in the industry. For a detailed understanding of any ambiguities, RISE recommends consulting legal counsel and reviewing the official bulletins. See our recently published list of the top community association attorneys with the specialized expertise necessary to protect the interests of the association.
