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Fannie Mae and Freddie Mac Lender Requirements Effective September 18, 2023: What’s New, and Why Are These Changes Important?

As of September 18, 2023, the Fannie Mae and Freddie Mac condominium and cooperative project eligibility standards have changed. Fannie Mae, otherwise known as the Federal National Mortgage Association, and Freddie Mac, otherwise known as the Federal Home Loan Mortgage Corporation, are government-created entities that buy mortgages on the secondary market and back others, including mortgages granted by private lending institutions large and small. As a result, Fannie Mae and Freddie Mac have a considerable influence over the national mortgage lending market. Importantly for condominiums and cooperatives, they require a project eligibility review in order to approve unit mortgages for their programs. This project eligibility review, which is only for condominiums and cooperatives with five or more units, covers a wide range of subjects: ownership structure and composition, reserve funds, litigation, insurance, and – importantly and the subject of the changed standards – the repair status of any condominium or cooperative building.

We expect to work closely with boards and property managers as lenders revise their form mortgagee questionnaires and may have further updates as we see additional issues raised.

The repair status of condominium and cooperative buildings found itself in the spotlight after the tragic collapse of the Champlain South Tower in Surfside, Florida in June 2021. In January 2022, in response to that tragedy, Fannie Mae and Freddie Mac issued temporary revised project eligibility requirements as to projects with potentially unsafe conditions which we discussed in a December, 2021 article. Fannie Mae and Freddie Mac have now finalized their project eligibility requirements as to the condition of condominiums and cooperative buildings (See Fannie Mae Selling Guide Announcement SEL-2023-06 and Freddie Mac Guide Bulletin 2023-15).

These updated and clarified standards for eligibility of condominium and cooperative buildings include the difference between critical repairs and routine repairs, the role special assessments play in review of maintenance concerns, the role of any inspections and reports received, and the documentation that lenders may need to collect to confirm maintenance status. While these finalized requirements are not dramatically different than the previous temporary requirements, they do provide additional context beyond those of the temporary requirements as to what lenders will be seeking as they review mortgagee questionnaires for eligibility. For that reason, in addition to the continued requirement that board members act to properly maintain, repair, and replace their project elements, boards and property managers will need to be sure to provide appropriate information on those mortgagee questionnaires, to ensure their condominium or cooperative project remains eligible for loans to be bought or backed by Fannie Mae and Freddie Mac.

The Importance of Eligibility

Eligibility is important for a condominium or cooperative to maintain. In the event that a condominium or cooperative is deemed to be “ineligible,” loans on its units will be rendered ineligible for purchase or securitization by Fannie Mae and Freddie Mac. Practically, this will mean that unit owners and prospective unit purchasers will not have the same number of options for banks at which to obtain or refinance mortgages. While some small lenders may continue to lend despite eligibility concerns, most lenders will be unable to do so. For this reason, unit owners who are selling their units may find sales terminated due to the inability of prospective buyers to obtain mortgages from their preferred lender or may find that they cannot refinance with their chosen lender. For these reasons, the concept of Fannie Mae and Freddie Mac eligibility is important for the marketability and value of a condominium or cooperative project’s units.

Routine Repairs versus Critical Repairs

With the updated lender requirements, Fannie Mae and Freddie Mac have provided a definition of routine repairs versus critical repairs that are performed to project elements. Examples of elements that Fannie Mae and Freddie Mac are concerned about are “sea walls, elevators, waterproofing, stairwells, balconies, foundation, electrical systems, parking structures or other load-bearing structures.”

“Routine repairs” are defined by Fannie Mae and Freddie Mac as those that are not considered critical and include work that is:

1. preventative in nature or part of normal capital replacements (for example, focused on keeping the project fully functioning and serviceable); and

2. accomplished within the project’s normal operating budget or through special assessments that are within guidelines.

“Critical repairs” are defined as those “repairs or replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building, or the financial viability or marketability of the project.” These critical repairs include, but are not limited to:

1. Material deficiencies, which, if left uncorrected, have the potential to result in, or contribute to, critical element or system failure within one year;

2. Any mold, water intrusions, or potentially damaging leaks to the project’s building(s);

3. Advanced physical deterioration;

4. Any project that failed to pass state, county, or other jurisdictional mandatory inspections or certifications specific to structural safety, soundness, and habitability; or

5. Any unfunded repair of more than $10,000 per unit that should be undertaken within the next 12 months (this does not include repairs made by the unit owner or repairs funded through a special assessment).

While these definitions are helpful, the interpretation of any repair will be up to the lender representative reviewing the information provided on a mortgagee questionnaire.

In addition, there is a carve out for deferred maintenance or damage that is “isolated to one or a few units that does not affect the safety, soundness, structural integrity, or habitability of the project.”

Special Assessments

Fannie Mae and Freddie Mac have also updated their requirements for eligibility based on the review of special assessment records. Boards and property managers will now be expected to provide extensive records of special assessments to lenders to ensure eligibility of the condominium or cooperative project, regardless of whether the special assessment is planned or currently being collected. Lenders are expected to collect the following information:

1. The purpose of the special assessment;

2. The date the special assessment was approved;

3. Whether the special assessment is planned or being collected;

4. The amount of the special assessment and how much remains to be collected; and

5. The expected date that the special assessment will be paid in full.

Any special assessment associated with a critical repair, which has not yet remediated the critical repair issue, will deem the condominium or cooperative project ineligible. It is important for boards and property managers to provide complete information as to special assessments to lender representatives to maintain eligibility.

Inspection Reports

The eligibility standards have also been updated to specify in more detail the inspection records that boards and property managers will need to provide, which includes any structural or mechanical inspection report or reports related to the condominium or cooperative project provided by any vendor, federal, state, or local authority within the last three years prior to the review date. Any statement in such records that indicates that critical repairs are needed, an evacuation order is in effect, and/or regulatory action is required will deem a condominium or cooperative project to be ineligible. If any report states that critical repairs are needed, the project will be deemed ineligible until such time as an engineer’s report or “substantially similar document” confirms that the concerns have been resolved. Unfortunately, Fannie Mae and Freddie Mac have not offered any further definition of what “inspection report” means and, thus, board members and property managers will need to engage in a case-by-case review of any form or information received from vendors, federal, state, or local authorities to confirm whether it qualifies as a “structural or mechanical inspection report.”

Documentation Requirements

Fannie Mae and Freddie Mac now have more expansive documentation requirements for lenders to review in order to confirm that condominium or cooperative project conditions do not require critical repairs. The documentation requirement is relatively open ended, which may result in lender representatives seeking documentation well beyond what has traditionally been expected. Fannie Mae and Freddie Mac guidelines provide the following examples of documentation that boards and property managers should be prepared to provide:

1. Board meeting minutes;

2. Engineer reports;

3. Structural and/or mechanical inspection reports;

4. Reserve studies;

5. A list of necessary repairs provided by the board or its management company; and/or

6. A list of special assessments provided by the board or its management company.

To any extent that a lender is requesting documentation that may be unreasonable or – most importantly – protected by privilege, boards and property managers should seek counsel.

Approach to the New Requirements

We would expect mortgagee questionnaires to be updated by lenders in the face of these new requirements. There is rarely a singular approach to completing all lender questionnaires, and each questionnaire will likely need to be reviewed on a case-by-case basis. This is particularly the case where lender representatives are given some leeway as to the materials to review to determine eligibility under the new guidelines. Most importantly, as boards and property managers review updated mortgagee questionnaires in light of these new requirements, they should consult with experienced condominium counsel to craft the appropriate response as to critical repairs. We expect to work closely with boards and property managers as lenders revise their form mortgagee questionnaires and may have further updates as we see additional issues raised.

Ryan R. Severance Condo Law Blog

If you have any need for legal services related to this article, or any similar matter, you can email Ryan at rseverance@mbmllc.com or any of our other attorneys at Moriarty Bielan and Malloy LLC at 781-817-4900 or info@mbmllc.com.

Ryan R. Severance