Fannie Mae Fine Print: What Happens If the Co-op / Condo Is in a Lawsuit?

The answer is tucked deep inside a thick document known as the "Selling Guide," which lays out the loans Fannie Mae deems eligible for purchase and the loans it does not. Fannie Mae will not buy a loan in a condo or co-op "for which the homeowners' association or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project."

Minor Exceptions

There are exceptions. If the lender determines that the pending litigation involves "minor" matters, such as a noise complaint, Fannie Mae does not consider the loan ineligible. "Minor" matters, according to the guide, include "litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense, and the amount is covered by the association's or co-op corporation's insurance."

Those three criteria are where a co-op or condo could run into trouble. Say that hypothetical co-op has a lawsuit against it — someone tripped during a renovation and is now suing — but the insurance policy's liability coverage will cover it, and the insurance company will provide legal defense. Sounds like the building is covered — unless the resident is suing for unspecified damages. Without such numbers, there is no way to know with certainty if the co-op's insurance is adequate.

It's a classic Catch-22, and it can be a deal-breaker for Fannie Mae.

Up to the Lender

"The bottom line is that we allow lenders to determine if litigation is minor," says Fannie Mae spokesman Andrew Wilson. If a lender thinks that the litigation should be considered "minor," they can file for a waiver of ineligibility.

Injuries are also taken into account, Wilson notes, adding that even in a case where serious injuries are involved, a lawsuit could still be classified as "minor" if all three of the criteria were met: legal counsel was appointed by the insurance company, the amount of damages sought was spelled out, and it was covered by the co-op's insurance policy.

And Fannie Mae's decision of ineligibility isn't necessarily irreversible, Wilson says. "We're always willing to take another look if circumstances change."

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