In response to this year’s tragic events in South Florida, beginning next month Fannie Mae will institute tighter guidelines over loans secured by condo and co-op projects with five or more attached units.
The new guidelines are intended to address concerns over aging infrastructure with significant deferred maintenance and are “designed to support the ongoing viability of condo and co-op projects,” says Fannie Mae. The new requirements call for additional paperwork and verification from lenders and appraisers, resulting in a stricter review of a property’s history. All parties to a transaction – including buyers, sellers, lenders and appraisers – should be advised to review their current paperwork and procedures, and adjust where necessary to meet the new standards.
According to the October letter from Fannie Mae some of the new requirements include:
Significant deferred maintenance and unsafe conditions
For condo and co-op properties with significant deferred maintenance, or projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions, loans secured by such units will not be eligible for purchase until the required repairs have been made and documented.
Significant deferred maintenance can include deficiencies that meet one or more of the following criteria:
- Full or partial evacuation of the building for more than 7 days, or an unknown period of time, is required to complete repairs
- The project has deficiencies, defects, substantial damage or deferred maintenance that
- is severe enough to affect the safety, soundness, structural integrity or habitability of the improvements
- the improvements need substantial repairs and rehabilitation, including many major components
- impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing
These policies will not apply to routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property. If damage or deferred maintenance is isolated to one or a few units and such damage or deferred maintenance does not affect the overall safety, soundness, structural integrity, or habitability of the improvements, then these project eligibility requirements do not apply.
Examples of this might include:
- Water damage to a unit due to a leaky pipe that is isolated
- Damage from a small fire impacting the interior of a small unit
However, if the subject property unit is affected, the standard required for property condition apply.
Any current or planned special assessment must be reviewed. The lender must obtain the financial documents necessary to confirm the association has the ability to fund any repairs. If the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed for the project to be eligible. If the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.
The lender must document:
- The reason for the special assessment
- The total amount assessed and repayment terms
- Documentation to support no negative impact to the financial stability, viability, condition, and marketability of the project; and
- Borrower qualification with any outstanding special assessment payment
Condo project manager ‘Unavailable’ status
When Fannie Mae becomes aware of projects that do not meet the temporary eligibility requirements, or that do not meet their standard Selling Guide requirements for a project eligibility, the status of projects in Condo Project Manager ™ (CPM) will be listed as “Unavailable.” Loans secured by units in any project with a CPM status of “Unavailable” will be ineligible for purchase, regardless of the project review process used in underwriting the loan. Lenders will be encouraged to check the status of a particular project in CPM, and submit any documentation that might resolve eligibility issues for projects noted as “Unavailable” – EFFECTIVE IMMEDIATELY.
The Selling Guide flexibility, that allows a lender to obtain a reserve study in lieu of the condo project meeting the 10 percent budget reserve requirement, will be suspended. Projects that budget less than 10 percent of the HOA’s assessment income may be at increased risk for significant deferred maintenance and special assessments. Lenders may submit exception requests through the Project Eligibility Review Service (PERS) process for established projects that do not meet the minimal reserve requirements but that have a reserve study demonstrating sufficient reserves. While this allowance is suspended, Fannie Mae will not consider such requests for new projects.
Project eligibility waivers
Effective immediately, Project Eligibility Waivers (PEWs) will not be issued for significant deferred maintenance, failure to obtain a certificate of occupancy, failure to complete or pass a regulatory inspection, or projects subject to large special assessments (as described above). All new requests related to PEWs for project insurance policy deficiencies will be suspended.
Unless otherwise specifically noted, these requirements will be effective against whole loans purchased on or after Jan. 1, 2022.