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Since the tragic collapse of the Champlain Towers South condo building in Surfside, Florida, which took nearly 100 lives and injured many more, there have been growing concerns about deferred maintenance. The fear that there are more buildings out there like this one, which was in need of significant structural improvements, has led to regulatory agencies getting involved.

Others were concerned, too, such as the insurance and lending industries. Their concerns and actions will all have a significant impact on the HOA industry, including self-managed communities.

Fannie Mae Leads Changes to Lending Guidelines

The biggest immediate changes come from Fannie Mae and Freddie Mac, government-sponsored entities that work within the secondary mortgage market. Although their focus has been primarily on affordable housing, their guarantee and purchase of mortgage loans made by lenders puts them into the middle of the deferred maintenance issue. That’s because they are not only buying loans for homes, but they are also purchasing loans for condominium units.

To minimize risk when guaranteeing and buying these loans, they have a set of guidelines. Now, this recent tragedy has seen them change their guidelines and add more restrictions. Effective January 1, 2022, Fannie Mae has enacted new guidelines to push associations and property management companies to immediately address any aging infrastructure and significant deferred maintenance. 

Fannie Mae will no longer guarantee or buy loans associated with condominiums with five or more units that have not made repairs that require full or partial evacuation for a week or longer. They will also not touch any loans associated with condominiums where there are defects or substantial damage related to soundness, habitability, or structural integrity.

Red flags for lenders will be factors like inadequate reserve funding, special assessments, budget deficits, and any association records that mention unsafe building conditions. For example, if any condo association puts less than ten percent of its budgeted income into a reserve fund, any condo in that building will not qualify for a loan. That building will also have to prove that any special assessment will not lead to a negative impact on the condo’s integrity and safety, marketability, and financial stability. Otherwise, repairs will need to be completed and inspected before any condo in that building will be eligible for a Fannie Mae-backed loan. To uncover other red flags, Fannie Mae says that lenders should review at least the past six months of a condominium association’s meeting minutes as well as any inspection, certification, or engineering reports.

Freddie Mac Follows Suit

Freddie Mac similarly updated its lending guidelines on December 15, 2021 that were put into effect on February 28, 2022 on any condominium with five or more attached units. Freddie Mac also will not provide lending for condominiums in need of significant repairs or show signs of deferred maintenance that impact the safety, structural integrity, and/or habitability of the condo building and units. Like Fannie Mae, Freddie Mac will want to see association meeting minutes, engineer reports, reserve studies, repair lists, and any documentation that shows building code violations.

What’s Not Impacted by New Lending Guidelines

The good news is that there are some issues that won’t change lending approval. This includes routine maintenance and repairs that fall within the condo association’s normal operating budget as well as any deferred maintenance that will not affect the overall safety, structural integrity, and/or habitability of any condominium. If these are the only issues, then a condominium can still be eligible for Fannie Mae or Freddie Mac financing. 

How to Address New Lending Guidelines

No matter how lending or regulatory guidelines changes, condominium boards always have a duty to maintain property values and provide a safe and sound place to live. They can do so by prioritizing proper maintenance, being proactive about all repairs, and ensuring projects are eligible for secondary financing from organizations like Fannie Mae and Freddie Mac. We recommend the following strategy:

  • Maintain detailed condo association records. Since lenders require more information to determine lending eligibility, it should be a best practice to help the association keep meeting minutes, reserve studies, engineering reports, inspection records, maintenance and repair records, and financial records updated and accessible. A good place to store the information is on a cloud platform.
  • Conduct regularly reserve studies. A good rule of thumb is to conduct these studies every five years. Make sure you use an engineer who is adept at condominium structures and components so you can get the best recommendations for repair, replacement, and costs.
  • Prioritize and schedule maintenance. By creating a schedule in advance, a condominium will be more likely to not fall into a state of disrepair. Work will be conducted regularly to get the most out of the materials and equipment in use. Plus, this will help keep costs down.
  • Ensure a relevant, adequate budget. Based on reserve study findings, a budget can be created that addresses potential repairs, maintenance, and improvement projects  for the year. The budget should also account for the new lending requirements where a minimum of ten percent of the condominium’s income is set aside in reserves.

Be Accurate on Lending Questionnaires

Questionnaires from mortgage lenders is nothing new. However, lenders now require that condominium associations fill out much more complex forms to determine if the project or a condo is eligible for lending. No condo is quite like another so there isn’t even standard answers that can be recommended for parts of the questionnaires.

Try to be as accurate as possible because any misrepresentations could lead to civil and criminal penalties. If you are unsure about any of the questions and how to answer them, it is a good idea to seek the professional advice of an attorney.

Helping Your Condo Association Be Prepared

Innovia and our co-op community are here to help you navigate through how to enact a more proactive strategy for preventative maintenance, provide assistance with reserve studies, and community budgeting. Contact us today to learn more.