Fannie’s tighter loan requirements post-Surfside collapse started Jan. 1; Freddie’s start Feb. 28. In the meantime, the list of no-loan condo projects will likely keep growing.
A nightmare scenario looms for condo buyers applying for certain types of federally backed mortgages. If you are selling or are looking to buy an attached condominium in a community with five or more attached units, conventional financing from mortgage giants Fannie Mae and Freddie Mac may soon become elusive.
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“Yes, lenders are declining projects even for a simple special assessment for repairs now. Things are just trickling in right now because the guidance started Jan. 1,” said one condo project approval expert, who asked to remain unnamed because he’s not the media spokesman for his company. “Soon enough we’ll see the effects hit all the condo market. I’ve only seen it affect projects with major issues at this point; meaning (the project) has code violations and millions of dollars of repairs underway.”
Answering these
questions honestly or possibly with a guess could bring
liability in the form of future lawsuits against HOA
stakeholders, such as the property management company, board
members, inspectors, engineers and the association.
If the questionnaire isn’t completely answered because the
answers are unknown or undetermined, it might mean the
purchase or refinance gets torpedoed.
Here is a sprinkling of questions included in Fannie Mae’s
Form 1076 condominium project questionnaire (posted December
2021 and updated to eight from five pages):
Question: Is the HOA aware of any deficiencies related to
the safety, soundness, structural integrity or habitability
of the project’s building(s)?
My take: If management didn’t know about any deficiencies,
for example, and answered as such, should they have
reasonably known these calamities could come up later?
Question: Is it anticipated the project will, in the future,
have such violations (zoning ordinances, codes, etc., which
are related to safety, soundness, structural integrity or
habitability)?
My take: For the love of peace, how could one possibly
determine if yet-to-be-written, jurisdictional codes trigger
new violations in the condo complex?
These dubious questions could be akin to a winning lottery
ticket for any attorney who lives in the world of HOA
litigation.
Why is this so problematic? The nation has a huge community
of really old condos and many of them are backed by Fannie
Mae and Freddie Mac mortgages. The U.S. has as many as
156,000 condo associations and cooperatives housing between
27 million and 32 million Americans, according to the
Community Associations Institute (CAI).
“Seventy percent of all condo loans in the U.S. are Fannie
or Freddie (backed),” said Dawn Bauman, senior vice
president of government affairs at CAI. “Sixty to 70% of all
condo complexes are more than 30 years old.”
Fannie Mae has a published list of 82 “unavailable”
California condo-projects, including the Marina City Club in
Marina Del Rey, which has $80 million to $140 million in
needed repairs according to a report last year. That a
10-acre complex is one of nearly 1,000 “unavailable” condo
projects nationwide. To Fannie Mae, unavailable means a
property is ineligible for purchase by the agency.
One mortgage executive told me Fannie is making the rounds,
emphasizing these new condo questions during lender visits.
So don’t be surprised if that unavailable list explodes as
Fannie collects more intel.
To be fair, Fannie and Freddie need to dig more deeply to
assess and consider condo structural risk before purchasing
those mortgages from lenders. The mortgage giants also may
disqualify a condo community for other reasons, such as a
lack of budget reserves.
If your loan is denied over the Fan or Fred HOA
certification answers, you may be able to get funded on what
the industry calls a non-warrantable loan. You should expect
to pay perhaps one-half to one point higher in rate than
conventional financing. You also might have to provide a
larger down payment or have more remaining equity compared
with Fannie-type requirements.
But buyer beware: Non-qualified mortgage lenders that offer
the exotic non-warrantable condo mortgages are not a loan
approval shoo-in, either.
For example, California-based LendSure has a condo guidance
checklist to help determine investor risks. The common three
items it looks at are investor concentration (how many
rentals are in the complex), single investor (does one
person or entity own a bunch of the units), and litigation
against the condo complex, according to Joe Lydon,
co-founder, and managing director of LendSure.
Why so much deferred maintenance? Unit owners are often
resistant to increased HOA fees or special assessments for
repairs and updates.
Condo complex building inspections can run $15,000 to
$50,000 depending on the number of units, according to
Bauman.
“Community Associations Institute is lobbying for laws
mandating reserve studies and building inspections,” said
Bauman. CAI is also asking Fan and Fred to give HOAs more
time to be able to address so many of the new HOA questions.
“Five years to ramp-up the requisite building inspections.”
Fannie Mae provides weekly updates of approved condo
projects in Florida.