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are they required by freddy mack ot fannie may in buying a condo or refinancing
Join the Conversation Comments (2)Can you provide a source of the reserve fund requirement?
It's disconcerting to keep hearing--especially from bankers, agents, accountants, & others who know better--that the reserve fund requirement is new.
The link below leads to Fannie Mae's "Selling Guide" from 2009 [the earliest version available online]; it's 1,200 pages of rules governing their loans. Jump to the middle of p. 563, & you'll find the "10% reserves" rule.
https://www.efanniemae.com/sf/guides/ssg/sg/pdf/sg1009.pdf
Consult the current Fannie Mae Selling Guide & you'll find the wording UNCHANGED. This is NOT a new rule.
Lenders that just decided to enforce this rule last year may find it easy & convenient to blame Fannie Mae now...but that's not accurate.
However, there's little debate as to whether the rule is dumb. It states that the association a] must have a budget line item for reserve funds contribution, & b] that it be at least 10% of total budgeted expenses. Yet:
1--There is NO requirement that these funds actually be deposited in reserves.
2--Fannie Mae does NOT care how much money is actually in reserve accounts, now or historically. Your reserves could have $10 or $10,000,000; it's not a factor.
Absurd? Yes...but that's the rule, & exceptions are rare.
The good news is that any banker can tell you up front--before you submit an app or pay a fee--if your building qualifies.
The only time borrowers need not be concerned with this rule is when lenders--typically local &/or small--plan to hold the mortgage in their own portfolio. If they're not reselling, they don't care about Fannie/Freddie rules.
The page 563 reference above indicates that the 10% minimum reserves is for Condominium property. It does not state that this requirement is for coop's, at least not on page 563.
You're correct.
Re co-ops, on p. 585-6 you'll find: "The project’s operating budget must...provide for adequate replacement and operating reserves."
And on p. 591: "The co-op corporation must maintain replacement and operating reserves."
Language in the most current Fannie Mae guide is the same; no 10% or other specific requirement is mentioned.
I’ve not heard of any co-op building being blacklisted by lenders due to non-compliance with Fannie Mae reserve rules…just condos.
If anyone is aware of a co-op mortgage denial where this rule has been invoked, please post details here.
While some people view this policy as heavy handed and the 10% threshold as arbitrary, it makes good fiscal sense. And it is usually cheaper to the shareholders in paying for capital repairs and improvements in the long run when compared to paying off loan interest.
Personally, I think the 10% amount is too low for full funding of capital repairs and replacements. I would suggest treating this requirement as a portion of what is needed with loans, assessments, selling more corporation stock (in the case of co-ops), tax credits, grants & special programs or other financing.
You may also wish to use a low risk investment fund or Certificate of Deposits to hold the funds until needed.
The last thing any condo or co-op needs in this economy is to have willing buyers who are unable to get mortgages as a result of the finances of the condo or co-op corporation.
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Yes, this 10% reserve fund requirement is now required and has been since Dodd\Frank was implimented in July 2011
It is called a 'reserve fund' and represents 10% of the annual common charges or maintanence collected for all condominiums and cooperatives and must be noted on the Annual Budget as, 'Reserve Fund', independent of any assessment or special assessment that may be imposed for work needed . There are ways to get a loan without it but the Condo or Cooperative you are buying should have this by now. Not having it should be of concern for any potential purchaser.
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