Fannie Mae lending for condos is about to change. And the implications for condo boards is substantial. The big sister and brother of mortgages are moving toward implementing stricter lender requirements for condominiums. RISE Association Management is following the developments to protect our clients from the negative consequences of these changes.
The Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, are updating project review requirements for condo and co-op projects, especially those in need of critical repairs or with significant deferred maintenance. The requirements define what constitutes critical repairs, material deficiencies, and significant deferred maintenance, while clarifying what routine repairs aren’t critical.
Fannie Mae lending for condos - Fact versus Fiction
Many condominium boards believe not qualifying for Fannie Mae financing does not adversely affect them. The assumption is such loans are for first time borrowers or lower price point borrowers. This assessment is incomplete, if not wholly misinformed. Condominium boards often conflate Fannie Mae conforming loans with FHA (Federal Housing Administration) Loans. It is true FHA loans are typically for low to moderate income borrowers, but Fannie Mae and Freddie Mac conforming loans still constitute the majority of home loans and require higher credit scores than FHA.
The Federal Housing and Finance Administration, the agency that oversees Fannie Mae and Freddie Mac, increased the conforming loan limit values for 2023 to $726,200. This is well above typical price points in even high-end condominiums in major markets. This is critical as conventional loans, often called conforming loan, must also comply with FNMA guidelines. In short, failure to comply with FNMA means you are also losing the ability to qualify for conforming loans, which as of 2021, constituted the majority of home loans.
FNMA approval for condos
Condo buyers, especially first-timers, likely don’t understand the implications of FNMA approval. Approval is not a requirement. But! It can make the condo purchase more challenging and may result in less favorable terms for the buyer. The benefit of FNMA approval is that it signals the condo meets certain standards that make it a lower risk for the lender. It also makes the condo more attractive to future buyers. Perhaps most importantly, FNMA approval means it meets safety standards.
Lender requirements for condos and impact to supply and demand
When a large percentage of buyers can no longer obtain financing because a particular condominium regime does not qualify for Fannie Mae conforming loans, it reduces the pool of available buyers, thereby reducing demand, and ultimately lowering sales prices. This creates a unique opportunity for a certain kind of bargain hunter: the investor. This is usually because business loans for investment properties are underwritten differently from typical home loans. Cash buyers are increasingly more common and looking to scoop up units in difficult-to-convey condominium associations. This often prompts the question: does the Board have a fiduciary duty to attempt to be complaint with FNMA guidelines? The answer to that is unfortunately: it really just depends. Sometimes the costs of compliance may outweigh the benefits of access to this pool of buyers- but more on that below.
Condo safety and Fannie Mae guidelines
Recent Fannie Mae and Freddie Mac lender bulletins come in response to concerns about aging infrastructure and financial instability in condo and co-op projects. The Champlain Towers South condo collapse in Surfside, Florida killed 98 people in June 2021. This tragedy sparked Fannie Mae and Freddie Mac to implement temporary requirements that specifically addressed condo structural safety; the lender bulletins are the first step to making those requirements permanent. There has been much criticism of knee-jerk regulations imposed by Fannie Mae in the wake of the Champlain Towers tragedy, despite said criticism, it is still clearly in the best interest of most owners and associations to attempt to comply with Fannie Mae guidelines.
New lender requirements for condominiums
Condos boards must pay close attention to these lender bulletins and the subsequent requirements for their homeowners to remain eligible to obtain Fannie Mae or Freddie Mac-conforming loans. Below is the summary of the new condominium financing requirements:
- 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.
- The changes are effective immediately and must be implemented for all new loan applications dated on or after Sept. 18, 2023.
CAI, the Community Associations Institute, is the international trade association that serves volunteer homeowner and condo associations. Dawn Bauman, VP of Government & Public Affairs for CAI, wrote this recap of the lender bulletin, and surmised possible consequences to condo boards:
- Special Assessments –must be reviewed by lenders to determine the purpose of the assessment, timing of execution of the assessment, original amount, expected date of being paid in full, and whether the assessment is related to a critical repair. Buildings with special assessments will be deemed ineligible.
- Inspection reports – if there is a structural or mechanical inspection report completed within the last three years, the lender must obtain a copy and review the report. If the report indicates an evacuation order, unaddressed critical repairs, or other habitability concerns, the project building/association will be deemed ineligible.
- Reserve study and funding plans – must comply with strict requirements including updates every three years. The reserve study must comment favorably on the project’s age, estimated remaining life, structural integrity, and the replacement of major components. NOTE: a reserve study is a budgeting tool, not an inspection report that will provide comments on structural integrity, which will likely be problematic for most condominium and cooperative buildings.
- Projects in litigation – now include alternative dispute resolution (ADR) or litigation proceedings – unless the ADR proceeding involves only minor matters that do not affect the safety, structural soundness, functional use or habitability of the project. The expansion of this definition will have unintended consequences for buildings in litigation that are completely safe.
- Reciprocity – Freddie Mac may rely on Fannie Mae’s CPM list of ineligible projects and both Fannie Mae and Freddie Mac can look to condominium associations certified by FHA. FHFA? Further, clear databases are being created to track eligibility. CAI continues to work with Fannie Mae, Freddie Mac, FHFA, and members of Congress to urge changes that will keep buildings safe for owners and maintain access to credit for condominium homebuyers/sellers.
Condo board management: What can you do?
RISE recommends condo boards work on creating a long-range financial plan to address infrastructure. There are often ways to use condominium loans in lieu of special assessments or increase reserve funding proactively to avoid being “blacklisted” by Fannie Mae. If your condominium has recently become ineligible due to these changes, there is still hope, but it starts by working with professional management, reserve study advisors, and those familiar with the lender requirements to create a plan to address the needs in the near term.
Like CAI, RISE recognizes the new Fannie Mae and Freddie Mac lender bulletins put greater pressure on condo boards. VOLUNTEER condo boards! The RISE mission is to empower condo board leaders to provide residents with quality of life and peace of mind through effective management. We are ready to assist your board and protect the livelihood of your current and future residents.
