Shortly after the collapse of the Champlain Towers Condominium in Surfside, Florida in 2021, Fannie Mae (“Fannie”) and Freddie Mac (“Freddie”), the government-sponsored entities which support the secondary mortgage market in the US and wield enormous power over residential lending, added an addendum to the standardized questionnaire form (“Form 1076”), which is designed to help lenders gather information from condominiums to determine eligibility for purchase by Fannie or Freddie of residential loans. The addendum was designed to obtain information about the status of maintenance and plans for addressing maintenance in condominiums.[1]
Concerns about aging projects, deferred maintenance, and the financial ability to fund maintenance, have persisted, and, in 2023, at the request of the Federal Housing Authority, Fannie Mae promulgated a Selling Guide Announcement (SEL-2023-06) and Freddie Mac a Selling Guide Bulletin (2023-15) as step toward more permanent guidelines toward lending eligibility for condominiums and cooperatives. The guidelines became permanent in September 2023.[2]
Fannie Mae characterizes these guidelines for lending as supporting the condo and co-op market and as an effort to protect borrowers from physically unsafe and/or financially unstable projects.[3] This mission is laudable and to be encouraged, however, a recent article in the January/February 2024 issue of Common Ground, by Mike Ramsey entitled “Blacklisted,” raises various concerns within the condominium and co-op communities, their managers, attorneys, and related professionals over the lending standards and questionnaires. These concerns include a sense of lack of transparency surrounding what answers or information may trigger a risk to lending availability, the risk of uneven application of standards, and the fact that associations and residents may not know they have been put on the conventional lending blacklist until it is a fait accompli (something that has already happened or been done and cannot be changed) and reports start coming in of owners not being able to sell or refinance as expected due to a lack of financing availability.[4] The article also discusses nervousness over potential legal liability generated by the lender questionnaires amongst associations’ agents and volunteer boards.
Specific relevant questions from Form 1076 that were added in reaction to the Surfside tragedy are the ones that appear in the addendum on pages 6 through 8 of the Form under the heading “Building Safety, Soundness, Structural Integrity, and Habitability.” Projects that are deemed to need critical repairs are ineligible for purposes of conventional lending and the recent lending guidelines define critical repairs to include such things as:
- 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);
- advanced physical deterioration;
- any project that failed to pass state, county, or other jurisdictional mandatory inspections or certifications specific to structural safety, soundness, 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).
The recent guidelines state that the above requirements do not apply if damage or deferred maintenance is isolated to one or a few units and does not affect the overall safety, soundness, structural integrity, or habitability of the project. However, Fannie Mae states in its Selling Guide Announcement that “special assessments” to address a critical repair that is not completed in and of itself will render a community ineligible.
Fannie Mae also points out that a need for critical repairs or an issue with significant deferred maintenance are just some of the reasons why a project may be unavailable for purchase by Fannie Mae. (Horne, 2023). As attorneys, we frequently see unresolved litigation can also adversely affect financing availability, especially if, as is often the case, legal counsel is unable or unwilling to estimate the association’s monetary exposure with certainty. Fannie Mae states that “most” projects listed as unavailable have other issues aside from critical repairs or deferred maintenance that render them ineligible such as significant litigation, hotel or resort characteristics, too much commercial space, or inadequate insurance (Horne, 2023).
As alluded to in Mike Ramsey’s “Blacklisted” article in Common Ground, Fannie Mae and Freddie Mac do have a proprietary databases that can be used by lenders as a shortcut in lieu of having to do a comprehensive review of a project to determine eligibility, however, the information in these databases is only available to lenders affiliated with Fannie and Freddie.[5] The restricted nature of these databases does add to complaints regarding a lack of transparency from associations and their agents and representatives. There is also apparently no clear path to redress an ineligibility determination. Fannie Mae merely, and perhaps paternalistically, states that that its database “allows us to proactively provide project eligibility determinations for our lender partners in a safe and sound manner” and “[a] project’s unavailable status can change when sufficient documentation is provided to confirm the eligibility issues have been resolved.” (Horne, 2023).
We have had experience with associations being unable to get conventional lender financing due to running afoul of Fannie/Freddie standards. Nonetheless, based on the information available, there are some common sense actions associations can take to avoid lending availability issues. These are things associations should be doing anyway:
- Reserve studies are an excellent tool to help associations plan and budget for future maintenance, however, if the association has had a reserve study done, it must follow it;
- Associations are charged with a duty of maintenance as provided under governing documents and must do so adequately and timely and budget. Use of a “special assessment” to fund a “critical repair” may very well render your community ineligible under latest guidelines and should be avoided;
- It is a good idea to review lending questionnaires with management to make sure the association has adequate information and records to answer and respond to them and to get an idea of what is necessary to maintain conventional financing eligibility.
Lending standards are complicated and are only getting more so. There are serious consequences if a community neglects those standards. While falling afoul of some lending standards, such as significant litigation, may, in some cases, be beyond an association’s control, associations do have control over maintenance and funding of maintenance, repair and replacement. Failing to adequately maintain means more than just increased costs to fix crumbling roads or leaking roofs; it can lead to a greatly reduced ability to sell units, a reduction in property values, and potential liability. The attorneys at Tilchin & Hall are available to answer questions regarding lending eligibility and making sure your community is on track to maximize financing availability. If you would like to speak to one of our attorneys, please call (248) 249-6203 or email us through the form below.
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[1] Form 1076 can be found here: https://singlefamily.fanniemae.com/media/15656/display
[2] SEL-2023-06 is available for download at: https://singlefamily.fanniemae.com/news-events/announcement-sel-2023-06-selling-guide-updates; Selling Guide Bulletin 2023-15 is available for download at: https://guide.freddiemac.com/app/guide/bulletin/2023-15
[3] Horne, Jodi. “The Future of Condo Lending.” Fannie Mae Perspectives Blog. July 12, 2023; https://www.fanniemae.com/research-and-insights/perspectives/future-condo-lending
[4] Ramsey, Mike. “Blacklisted.” Common Ground, vol. 40, No. 1, Jan./Feb. 2024, pages 27-29.
[5] See, e.g., Take the Shortcut to Condo Project Eligibility: https://singlefamily.fanniemae.com/media/36926/display
