The Loan Arranger: Top Fed Guidelines Co-op / Condo Boards Need to Know
July 26, 2011 — When CPA Chris Griebel was at an annual condo association meeting recently, he saw firsthand how the ripples of the financial crisis were trickling down to co-ops and condominiums. Although the building was financially solid, the sponsor still owned a significant percentage of the apartments — and since lenders consider high non-resident ownership a black mark, condo owners couldn't get mortgage refinancing when their apartment loans came due.
Why? Because two government agencies — the Federal National Mortgage Association (popularly known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — carry most home-mortgage loans, and so other lenders end up adhering to rules set up by the two entities.
Those guidelines, known as "The Selling Guide," have been on the books for decades, says Griebel, senior manager with Czarnowski & Beer. But within the past few years, lenders have started to follow them more closely. And the guidelines themselves have become more rigorous. Each lender has to make sure your co-op or condo building meets the specifications in The Selling Guide at the same time that it scrutinizes the buyer's individual finances.
"Banks have to listen to the big man here — and it's Fannie or Freddie — and what these guys are saying is, 'You're on your own if you don't meet our specifications,'" says Griebel, who estimates that as many as 90 percent of loans wind up under the auspices of Fannie or Freddie.
Attorney Pierre E. Debbas, a partner at Romer Debbas, says the belt-tightening started about two years ago. "What they're trying to do is to make up for their lax lending regulations over the real estate boom by being over-diligent, and they're looking for reasons not to lend," he says, noting that the issues are particularly thorny for new developments. One rule, for instance, stipulates that 70 percent of the units have to be in contract before Fannie Mae will write a mortgage. "You can't have 70 percent all-cash buyers, so how do you get there? You have to have lenders who are willing to take a risk."
Top Five Fannie Mae Requirements
Reserve fund requirements. One standard, which frequently trips up condo and co-op loan-seekers, requires that a building set aside 10 percent of revenue for a reserve fund. If your building does not have this, it should set it up immediately.
CPA Richard Montanye, a partner at the firm Marin & Montanye, says lacking that reserve line-item causes the most problems for condo and co-op buyers. "We have boards that have been setting aside money for years in reserves but didn't have a specific line item to do so," he says. "Now they're making it a line item in order to make it conform to the Fannie Mae regulations." Debbas says that some co-ops or condos face problems even though they have as much as 30 percent of annual charges in reserve but no line item.
Why does it matter if the building has 10 percent set aside for reserves when it comes to an individual's home loan? Montanye says the rationale is that if there is no reserve and there is a big capital expense, the building would have to raise maintenance — affecting unit-owners' personal finances and potentially jeopardizing the loan. The problem is not in every building or even in every case, the CPA notes. "I recently spoke to a board at a building that had nine refinances or sales in the past year, and seven went through fine and two had problems."
Sponsor ownership restrictions. Under the theory that higher sponsor ownership than resident ownership can destabilize the building, the sponsor can own no more than 10 percent of the units. Lenders look unfavorably upon high non-resident ownership.
Arrears restrictions. No more than 15 percent of the units can be more than 30 days in arrears for maintenance or common charges — while the financial crisis has made it harder for all homeowners to keep up with their monthly fees.
Insurance premiums. The budget must include a provision for all insurance deductibles. Debbas says one of the first signs of the impact he noticed was how lenders insisted buildings carry more insurance. In one case, the co-op board had a $1 million policy but the lender wanted $1.25 million. (The board upped its policy.) "The increase in the premium was like $120 a year, but the building said no at first, thinking, 'Why? We don't get it.' Once three or four refinance loans got rejected, that got them to do it," Debbas says.
Management cancellations. If there is a professional management company in place, any cancellation clause for the contract must be 90 days or less. Griebel says some firms prefer longer-term contracts, but buildings need to convince them the shorter term is necessary in order to be attractive to lenders.
For articles going back to 2002, join our Archive >>