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Ask Eli: Condos must be aware of new Fannie Mae guidelines

This regularly scheduled sponsored Q&A column is written by Eli Tucker, Arlington-based Realtor and Arlington resident. Please submit your questions to him via email for response in future columns. Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist. Enjoy!

Question: Can you summarize the important details of Fannie Mae’s new condo loan deferred maintenance requirements?

Answer: In response to the collapse of the condo building in Surfside, Florida last year, Fannie Mae issued new “temporary” lending requirements, effective January 1, 2022, for Condos and Co-ops to protect against future deferred maintenance issues and, hopefully, incentivize Associations to address issues faster.

I will highlight some of the key changes below, but I advise Condo and Co-op Boards/Management to review the policy changes in detail to ensure properties in your communities remain warrantable (banks will lend using traditional mortgage products), otherwise you’ll risk a significant drop in property values by limiting your buyer pool to cash buyers or those who qualify for alternative lending products (non-Fannie).

Significant Deferred Maintenance and Unsafe Conditions

This is the strictest of the new requirements, but also leaves a lot of grey area and subjective decision-making by each bank’s underwriter(s). The Fannie Mae language states:

“Loans secured by units in condo and co-op projects with significant deferred maintenance or 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. These projects will remain ineligible until the required repairs have been made and documented. Acceptable documentation may include a satisfactory engineering or inspection report, certificate of occupancy, or other substantially similar documentation that shows the repairs have been completed in a manner that resolves the building’s safety, soundness, structural integrity, or habitability concerns.

Significant deferred maintenance includes 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
      • 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 do not apply to routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property. Also, if damage or deferred maintenance is isolated to one or a few units 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 scenario include water damage to a unit due to a leaky pipe that is isolated or damage from a small fire impacting the interior of a specific unit…”

It’s possible a Fannie Mae loan can be approved on one unit and denied on another. The grey area comes from 1) how the Association responds to the questionnaire sent by the lender and 2) how each lender’s underwriter(s) determine what qualifies as significant/substantial deficiencies. It’s possible that the interpretation of a question, and thus the way that question is answer, can change based on who from the Management company is responding. The same difference an interpretation of a response and support information can occur between underwriters at different banks.

Special Assessments

Associations should be much more careful when choosing to issue a special assessment (as opposed to borrowing or increasing condo dues) because of the extra scrutiny that now applies for loans and possibility that issuing a special assessment may cause properties in the building to be unwarrantable. The Fannie Mae language states:

“Any current or planned special assessment, even if paid in full for the subject unit, must be reviewed to determine acceptability… The lender is expected to 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 or the project is not eligible. Additionally, If the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.”

Reserve Requirements

Associations are now at risk for loans not being approved if they are not allocating 10% or more of their annual budget towards Reserves. In my opinion, this is the most unreasonable of the new Fannie requirements because it doesn’t take other relevant details into account like whether or not the account is overfunded or the recommendations of the Reserve Study. To issue a blanket requirement for every Association to contribute 10% of their annual budget to Reserves is bad policy.

However, there is some flexibility in this requirement. Borrowers putting 10% or more down can get an exception that will allow them to proceed with the loan. Borrowers with less than a 10% down payment have to go through an expensive and time-consuming exception process.

The full guidance letter from Fannie Mae can be downloaded here.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at [email protected].

If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at 703-539-2529.

Video summaries of some articles can be found on YouTube on the Ask Eli, Live With Jean playlist.

Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. 703-390-9460.

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