High standards: Fannie Mae, Freddie Mac Update Requirements To Secure Loans In Condos

The following article was written by Dawn Bauman of Community Associations Institute and comes as recommended reading from our senior partner Charlie Perkins:

Condominiums and housing cooperatives must meet updated structural safety requirements to secure loans for mortgages backed by Fannie Mae and Freddie Mac. The government-sponsored enterprises released new guidance in late 2021 after the partial collapse of Champlain Tower South in Surfside, Fla., in June, generated concerns about aging infrastructure and deferred maintenance.

Fannie Mae and Freddie Mac secure loans for mortgages issued by credit unions, banks, and other financial institutions. The updated requirements apply to condominiums and cooperatives that contain five or more attached units. The new requirements are in addition to, and do not supersede, any of the previous lending conditions.

Community association board members and managers are expected to gather details and prepare reports to share with appraisers and lenders.

Freddie Mac

In December, Freddie Mac released guidance related to property eligibility and appraisal requirements for condominiums and cooperatives in need of critical repairs as well as buildings with special assessments. The guidance goes into effect Feb. 28.

Buildings in need of critical repairs will be no longer be eligible for Freddie Mac-backed loans. Mortgage providers are expected to determine compliance with the new requirements.

Freddie Mac is not changing its stance on community association reserves; it will continue to allow new buildings with less than 10% in reserve funds to secure loans if the most current reserve study is provided. It also is requiring documentation that at least 95% of any special assessments budgeted are being collected.

Fannie Mae

The new requirements, released in October, went into effect Jan. 1. They include:

  • Unsafe conditions: Building projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions will be ineligible until such repairs are made.
  • Significant deferred maintenance: Buildings with deficiencies that meet one or more of the following criteria will be ineligible:
    • Buildings that require at least seven days of full or partial evacuation to complete necessary repairs.
    • Buildings with damage, deficiencies, or defects severe enough to affect safety, soundness, or structural integrity; and/or those where substantial repairs and rehabilitation are required; and/or those where one or more of the major structural or mechanical elements (such as the foundation, roof, load-bearing structures, plumbing, electrical system, or HVAC) are impeded.
  • Special assessments: All current or new special assessments will be reviewed for acceptability under the following criteria:
    • Reason for the special assessment.
    • Assessment amount and repayment terms.
    • Demonstration of no negative impact to financial stability, viability, condition, or marketability.
  • Reserves requirements: Ten percent budget reserves are required, regardless of reserve study assessments (and in addition to any special assessments that may be in place).

These requirements place a heavy focus on structural and financial stability. Documentation also is important; community associations must carefully maintain and make available to appraisers and lenders all pertinent paperwork (appraisals, most recent six months of meeting minutes, financial statements, engineering reports, inspection reports, and reserve studies). Review the full Fannie Mae requirements.

CAI is working with Fannie Mae and Freddie Mac on educating communities about the new requirements to secure loans for mortgages issued by credit unions, banks, and other financial institutions. CAI also is engaging with management companies and attorneys to further advise our members on high-rise safety.

>> For additional resources, visit www.caionline.org/CondoSafety.