Fannie Mae Tightens Rules for Lenders in Wake of Condo Collapse

The fallout keeps coming from last summer’s condominium collapse in Surfside, Florida. In the latest development, Fannie Mae, the federally backed mortgage giant, has announced that it will no longer guarantee mortgages in co-ops or condominiums that have levied an assessment to pay for deferred maintenance that affects the structural integrity of the building. Fannie Mae is also requiring lenders to more closely scrutinize co-op and condo reserve funds and assessments before they issue mortgages. The new rules affect the mortgages of individual homebuyers – not a building’s underlying mortgage. They’re labelled “temporary, and they go into effect Jan. 1, 2022.

“Loans secured by units in condo and co-op projects with significant deferred maintenance or in projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions are not eligible for purchase,” Fannie Mae states in a new Lender Letter. “These projects will remain ineligible until the required repairs have been made and documented.”

So Fannie Mae will no longer back mortgages of people trying to buy into a co-op or condo building with an Unsafe rating or a Safe With a Repair and Maintenance Program (SWARMP) designation after a mandated facade inspection under New York City’s Facade Inspection and Safety Program.

Many New York lenders sell their co-op and condo mortgages to the federally backed mortgage giants Fannie Mae and Freddie Mac, which stamp them with a repayment guarantee in the event of a default and then sell them off in the form of mortgage-backed securities. Fannie Mae’s new restrictions on which mortgages it will purchase from lenders could have a chilling effect on apartment sales in co-ops and condos with extensive deferred maintenance.

(Like what you're reading? To get Habitat newsletters sent to your inbox for free, click here.)

Jodi Horne, director of single-family collateral risk management at Fannie Mae, writes in a blog post: “We have reminded lenders and appraisers that appraisals on units in condo and co-op projects must document any special assessments or deferred maintenance that may impact the safety, soundness, structural integrity or habitability of a condo or co-op unit, or the overall project and its amenities.”

In the Lender Letter, Fannie Mae advises lenders of new mortgages that they will no longer have the flexibility of obtaining a reserve study in lieu of a building meeting the requirement to keep 10% of its operating budget in reserve. “Reserve studies are an important tool to help HOAs plan for future needs,” the letter states. “It is best practice for HOAs to obtain a reserve study, keep it updated and follow its recommendations for reserves and maintenance.” The letter adds that boards that fail to set aside 10% of the operating budget in reserves may be at risk for “significant” deferred maintenance and special assessments.

Lenders must also scrutinize assessments before issuing a mortgage, including the following: the reason, amount and repayment terms for the assessment; proof that the assessment won’t damage the building’s financial stability or marketability; and proof that the borrower can pay the assessment.

“Even before the Surfside collapse, the industry recognized the challenge posed by the aging of buildings that were constructed or converted from rentals in the 1970s, ’80s and ’90s,” Horne writes in her blog post.

She cites a 2020 report from the Foundation for Community Association Research called Breaking Point: Examining Aging Infrastructure in Community Associations. It stated that many co-op and condo boards “are focused on keeping regular assessments low and only investing in visible, immediate outcomes. Too often … associations fail to recognize serious structural and system failures. When damage becomes so obvious that it cannot be ignored, the tendency is to make superficial or temporary repairs and postpone comprehensive, in-depth restoration.”

Now, five months after the Surfside collapse, that 2020 report sounds eerily prescient. The new Fannie Mae guidelines are part of a growing effort to make sure history doesn’t repeat itself.