Fannie Mae and Freddie Mac Issue New Loan Eligibility Requirements for Units in Community Associations
By Vanessa Pena, Esq. February 2, 2022
New loan eligibility requirements for units in community associations have been issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in response to the collapse of Champlain Towers in Florida. These new requirements may potentially impact buyers and sellers of condominiums and cooperative shares in New Jersey.
Fannie Mae Lender Letter (LL-2021-14)
Fannie Mae’s new requirements in its Lender Letter (LL-2021-14), effective January 1, 2022, notify lenders and borrowers alike that “loans secured by units in condominium or cooperative buildings that have significant deferred maintenance, or those that are in projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions, are not eligible for purchase” with a Fannie Mae mortgage. These projects and loans will remain ineligible “until all required repairs have been made and documented in an acceptable manner.” Although Fannie Mae has indicated that these new requirements are temporary, implying that they may be phased out after a period of time, for now Fannie Mae has directed lenders to follow them.
Fannie Mae defines “significant deferred maintenance” to include deficiencies that meet one or more of the following criteria:
• “full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time;
• 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 [sic]; or
• 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.”
LL-2021-14 also states that “projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or re-certifications” are also ineligible.
LL-2021-14 further notes that planned or current special assessments must be reviewed, even if paid in full for the unit under consideration, and that the prior practice that allowed a lender to obtain a reserve study in lieu of the condo project meeting Fannie Mae’s 10% budget reserve requirement has been suspended. Project eligibility waivers will also “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.”
The Lender Letter ends by recommending “best practices and reminders,” which include “reviewing the past six months of a project’s Association meeting minutes” and obtaining “information about any maintenance or construction that may have significant safety, soundness, structural integrity, or habitability impacts on the unit or the project.” This review may also include a review of “any available inspection, engineering, or other certification reports completed within the last five years to identify deferred maintenance that may need to be addressed.”
Freddie Mac Bulletin 2021-38
Freddie Mac also issued a bulletin in December 2021 which, like the Fannie Mae letter, issued temporary lender requirements in the wake of the Champlain Towers collapse. Freddie Mac’s Bulletin 2021-38 applies to all mortgages “secured by units in projects with five or more attached units.” These requirements become effective on February 28, 2022, and provide that mortgages secured by units in condominium or cooperative projects in need of “Critical Repairs,” as defined by Bulletin 2021-38, are not eligible for sale to Freddie Mac. Bulletin 2021-38 defines “Critical Repairs” as “repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s) and/or that impact unit values, financial viability or marketability of the project.” Examples of Critical Repairs include:
• “All life safety hazards
• Violations of any federal, State or local law, ordinance or code relating to zoning, subdivision and use, building, housing accessibility, health matters or fire safety
• Material Deficiencies (as defined in Bulletin 2021-38)
• Significant Deferred Maintenance (as defined in Bulletin 2021-38)”
Bulletin 2021-38 notes that acceptable sources of documentation to determine if a project is in need of Critical Repairs include: “HOA or Cooperative Board meeting minutes, engineer’s reports, reserve studies, a list of necessary repairs provided by the HOA, Cooperative Corporation or management company, and other substantially similar documentation.” Communities in need of Critical Repairs “will remain ineligible until the required repairs and/or inspection report have been completed and documented.” Additionally, sellers are obligated to review “an engineer’s report or substantially similar document” in order to determine that the repairs resolved the subject building’s “safety, soundness, structural integrity, or habitability concerns.”
Bulletin 2021-38 makes note that these temporary requirements do not apply to Routine Repairs and Maintenance (as defined in Bulletin 2021-38), or damage or deferred maintenance to one or a few units in the community, “provided that there is no impact to the overall safety, soundness, structural integrity, or habitability of the improvements.”
Bulletin 2021-38 also requires that “any current special assessment(s), even if paid in full for the subject unit, be reviewed to determine eligibility.” It is also worth noting that Freddie Mac is not changing reserve requirements for any of its project review types within Bulletin 2021-38. Sellers may continue to review and rely on a “working capital fund or a reserve study when the community’s budget provides less than 10% replacement reserves.”
As part of Bulletin 2021-38, Freddie Mac and Fannie Mae developed a joint Form 476A, an Addendum to Form 476, Condominium Project Questionnaire, which may assist Sellers to determine whether a community meets the temporary Condominium and Cooperative Project requirements announced by both entities.
If you have any questions or concerns pertaining to these new requirements, please do not hesitate to contact our office.
This bulletin does not constitute legal advice and is for informational purposes only.