Luxury Condo Feels the Sting of Fannie Mae’s New Guidelines

When buyers at 75 Wall St., a luxury condo in Manhattan’s Financial District, were denied residential mortgages earlier this year, it became clear the building was a casualty of stricter enforcement of Fannie Mae’s new lending guidelines. 

The 15-year old development has more than 35 percent of its square footage allocated to commercial space and this made (and still makes) it unavailable for lending under Fannie Mae’s rules. However, wider implementation of Fannie Mae’s newest guidelines resulted in what Orest Tomaselli, president and CEO of reserve study preparation firm, Strategic Inspections, calls “reciprocal denials,” where conventional lenders follow Fannie Mae’s lead. 

A significant portion of the apartments at 75 Wall St. are studios and one bedrooms and the typical buyer needs financing to close. “Essentially all sales were stopped in the building,” says Dylan Cecchini, FirstService Residential’s general manager of the building. He was accustomed to explaining to lenders how the condo’s commercial and residential spaces were entirely separate and did not present a risk for residential mortgage lending. “Those answers were no longer acceptable,” he says.  

The key to unlocking mortgages at 75 Wall St. was an updated and forensically detailed split reserve study.

The building retained Tomaselli, who is also president of project review at CondoTek, to bring engineers into the building. He identified how the new split reserve study would outline the clear division of financial responsibilities between the commercial and residential sides of the building and attest to the long term structural, mechanical and financial health of the building. A reserve study is a detailed assessment of all the components of a building from the lobby to the roof and provides information about upgrades and repairs. 

“Having an outline of all the mechanical components and structural components and their condition, overlaid with a financial analysis of the building is really the key to unlock residential mortgage financing,” Tomaselli says. 

A split reserve study showing the clear separation of commercial and residential responsibilities isn’t always going to open up paths to lending, particularly if critical repairs have been postponed. This wasn’t the case at 75 Wall St. The condo has modernized elevators, renovated the lobby and common corridors and replaced half the hot water generators over the past three years. While these projects used portions of the building’s multi-million dollar reserve fund, they extended the life of the most expensive components of the building. These were important elements that bolstered the split reserve study. 

To implement the reserve study, says Cecchini, a funding plan needs to be adopted that is acceptable to the building. The board must also commit to following the reserve study’s program of maintenance and upgrades in the coming years. “Any board will have to follow the reserve study to a T because loan underwriters will be checking,” Cecchini says. 

The building was recently cleared for conventional financing by Chase. The entire process, from mortgage denial to mortgage approval took six months. Cecchini is confident other banks will follow Chase’s lead.