Following the collapse of the Champlain Towers South Condominium in Surfside, Florida, in 2021, government backed mortgage lenders, Fannie Mae and Freddie Mac, issued temporary project review requirements relating to significant deferred maintenance in condominiums, co-ops, and similar developments. To assess a project’s eligibility, Fannie Mae and Freddie Mac each promulgated a standardized “Condo Project Questionnaire Form” to obtain information related to significant deferred maintenance, the plan for addressing same, and the corresponding financial burden on condominium associations and unit owners.
These requirements have had a major impact on real estate developers and condominium associations and opened the door to potential litigation relating to the private sale of condominium units and similar properties. Fast-forward to 2023, at the direction of the Federal Housing Finance Agency (FHFA) Fannie Mae and Freddie Mac have updated and relaxed their requirements for lenders to issue loans to prospective buyers of condominium units as a first step to offering permanent guidelines on lending eligibility.
The following article answers questions real estate developers and condominium associations have relating to the updated bulletins.
What are the New Bulletins?
The new guidance is provided by Fannie Mae Selling Guide Announcement (SEL-2023-06) and Freddie Mac Selling Guide Bulletin 2023-15. These were at the direction of the FHFA to move towards permanent guidelines for lenders servicing condominium units.
What are the Details of the Bulletins?
The new bulletins retire the temporary requirements set forth in 2021 by Lender Letter LL-2021-14. According to Fannie Mae, the new bulletins, “assist lenders in identifying projects that may have issues that result in unsafe conditions, and to promote sustainable homeownership. Fannie Mae is updating its project standards policies to address projects in need of critical repairs, and projects that have material deficiencies (such as significant deferred maintenance) or special assessments.” The new requirements apply to all condo loans and all loans in a co-op project with five or more attached units, as well as loans under the waiver of project review policy. While there may be fewer ineligible projects under the new guidelines, many lenders are likely to remain wary of older condominium projects or those that may be unable to finance necessary upgrades in the future.
The Fannie Mae/Freddie Mac project review requirements do the following:
- define critical repairs, material deficiencies, and significant deferred maintenance, including defining routine repairs that are not considered critical;
- prohibit sale of condo loans and co-op share loans in projects in need of critical repairs;
- prohibit sale of condo loans and co-op share loans in projects with current evacuation orders due to unsafe conditions;
- require a review of all structural or mechanical inspection reports that have been completed within 3 years of the project review date;
- provide new requirements for condo or co-op projects with pending or approved special assessments;
- prohibit sale of condo loans and co-op share loans in projects with unfunded repairs totaling more than $10,000 per unit; and
- prohibit sale of condo loans and co-op share loans in projects that have an “Unavailable” status in Condo Project Manager™ (CPM™).
What Are the Definitions as set by the Bulletins?
Critical Repairs
Repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s) and/or that impact unit values, financial viability or marketability of the project. These include:
- Material deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year;
- Any mold, water intrusions or potentially damaging leaks to the project’s building(s) that have not been repaired;
- Advanced physical deterioration;
- Any project that failed to pass state, county, or other jurisdictional mandatory inspections and/or certifications specific to structural soundness, safety and habitability; or
- Any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment).
Examples of some items to consider include, but are not limited to, sea walls, elevators, waterproofing, stairwells, balconies, foundation, electrical systems, parking structures or other load-bearing structures.
Routine Repairs
These repairs are not considered to be critical and include work that is:
- Preventative in nature or part of normal capital replacements (e.g., focused on keeping the project fully functioning and serviceable); and
- Accomplished within the project’s normal operating budget or through special assessments that are within guidelines.
As a reminder, Fannie Mae and Freddie Mac have definitions for material deficiencies and significant deferred maintenance.
Material Deficiencies
Physical deficiency that affects a property’s safety, soundness and structural integrity.
Significant Deferred Maintenance
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; or
- 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
What do the new Bulletins Mean for Condominium Associations?
While the new bulletins only directly impact lenders, condominium associations need to be cognizant of these changes and their likely impact.
Two changes condominium association should pay particular attention to are:
- Lenders are now required to review all structural and mechanical inspection reports, including reserve studies, completed in the prior three years from the loan project review.
- Lenders are now prohibited from issuing loans for complexes with unfunded repairs totaling $10,000 or more per unit.
Additionally, it is likely that lenders will continue requesting an expanded range of documents related to the condominium when assessing eligibility. This may include board meeting minutes, board meeting notices, and other documents related to a condominium association’s plans for financing and completing future repairs. Consequently, condominium developers and associations should keep in mind that certain financial or budgeting practices related to maintenance of the condominium may impact the eligibility of individual condominium units.
When do the new Bulletins go into Effect?
September 18, 2023, for all new loan applications, but lenders were authorized to incorporate changes from the date the guidance was issued in July.
What About Form 1076?
There are no changes to Form 1076 for now. The bulletins were designed to clear up expectations on answers to Form 1076 and offer permanent guidance for lenders. Many lenders are likely to continue using Form 1076 (or similar questionnaires developed in-house) as a tool to assess risks associated with loans in condominium developments.
Are Condominium Associations or Developer Controlled Associations Required to Complete Form 1076?
No, condominium associations and associations still under developer control are not required to complete Form 1076. However, if the association or its designated representative does complete Form 1076 and provides inaccurate or incomplete information, the association may be deemed ineligible and may be subject to civil liability.
What Else do Condominium Associations and Developers Need to Know About Form 1076 and the New Guidelines?
The guidelines continue Fannie Mae’s and Freddie Mac’s efforts to address what they have determined to be risky investments. As more states, such as Florida and California, continue to pass laws relating to condominium inspections and reserve requirements, Condominium Associations and developers of condominiums should expect Form 1076 and the Fannie Mae and Freddie Mac guidelines to continue to evolve. If associations or developers have further questions on Form 1076 and/or the new guidelines, they should consult with their legal counsel.
