The tragic collapse of the Champlain Towers in Florida has forced lenders and other industry stakeholders to look for clear and standardized guidance on how to analyze ongoing risk in residential buildings with aging infrastructure and significant deferred maintenance. This concern is expected to grow in the future as most of the nation’s stock of condominium and cooperative projects were built more than 20 years ago.
The Federal National Mortgage Association (“FNMA” or Fannie Mae) has already taken the lead in this matter and has established new ‘temporary’ guidelines for all whole loan and Mortgage-Backed Securities pool purchases. This new standard will be taking effect on January 1, 2022, and will be in effect until further notice.
Fannie Mae, the mortgage loan guarantor, has recently changed its policy on how it treats Utah community association properties. Read on to see how these changes could affect your HOA or condo association.
What is Included in the New Guidelines
Loans secured by units in condo and cooperative 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. In addition, condominium or cooperative projects that do not pass local regulatory inspections or recertifications are not eligible for Fannie Mae financing. Waivers of this policy will not be granted by Fannie Mae.
Not only are projects with deferred maintenance conditions ineligible, Fannie Mae makes it clear that the project is also ineligible simply if a lender can’t make a determination if deferred maintenance or unsafe conditions exist.
Impact on Community Associations
This is where Associations and their management companies must come together to provide information so lenders can make safety and soundness determinations. Obviously, lack of financing options for older condominium and cooperative projects will have a negative effect on marketability and, ultimately, property values.
Fortunately, Fannie Mae is suggesting a variety of ways for lenders to make project safety and soundness determinations and has not made this a burden for Associations and community management companies alone. Fannie Mae is suggesting that detailed reviews of monthly financial documents, budgets, reserve studies, board meeting minutes, and special assessments will be critical in their policy.
HOA Strategies’ Response
For these reasons, HOA Strategies will continue to advocate for adequately funding the Reserve Fund and following the recommended timelines and project maintenance of the Reserve Study. Any indications of “deferred maintenance” may affect the property values and ability of current and potential owners from receiving loans for the property.
For our current clients, HOA Strategies manages the resale and disclosure process for current owners, potential owners, title companies, lenders, and real estate agents; but it is ultimately the Board’s duty to make sure potential buyers are adequately informed about the condition of the building.
The following questions that major lenders are now requiring on their forms will be added to the Condominium and Cooperative Lender Questionnaire templates in the Eligibility Questions section for condo associations:
- Q1: Is the HOA and/or management company aware of any conditions or project-wide deferred maintenance within the project that may negatively impact the safety, structural soundness, habitability, or functional use of the project as a whole or any individual units?
- If yes, describe and provide supporting documentation, e.g., architect’s and/or engineer’s reports, insurance inspections, notices of pending or active building code violations, fines or liens from local building authority, special assessments levied for repairs related to these issues, reserve study prepared by an independent third party.
- Q2: Has any local regulatory, authority, or inspection agency provided any notices to the HOA to make repairs due to unsafe conditions?
- If yes, are all repairs affecting safety, soundness, and structural integrity complete?
- If yes, has the HOA incurred any loans to finance improvements or deferred maintenance?
- Q3: Has an engineer’s report and/or inspection been completed in the past 5 years?
- If yes, does the report from the licensed engineer indicate that the project is structurally sound and that the condition and remaining useful life of the project’s major components are sufficient?
- Q4: Has the project failed to pass local regulatory inspections or recertifications?
- Q5: Has the project ever been fully or partially evacuated to complete repairs?
- Q6: Has the project failed to obtain an acceptable certificate of occupancy?
- If yes, what is needed to obtain the certificate of occupancy or to pass local inspection or recertification?
HOA Strategies looks forward to continuing working with Associations to ensure the financial and structural integrity of the community. Please consider the above lending requirements when discussing budgets, adequacy of reserve funding, and maintenance plans for your Association. There are lots of moving parts, intricate complexities, and nuances to protecting the Association, the owners, and your property values.
If you need guidance on how to answer these new lending disclosures for your Assertions then please contact us. We look forward to working as a trusted partner with your Board to ensure property values are protected and to properly disclosing the required information to lenders. (*Article adapted from information from www.homewisedocs.com).