NAR and SCR were alerted to complications in deals with common ownership caused by 2022 updates to Freddie and Fannie procedures to help prevent safety issues resulting from common ownership of real estate with significant deferred maintenance.

The new Freddie/Fannie procedures are risk management procedures that have resulted from the condo collapse in Florida (e.g., Surfside) which are reported to have occurred as a result of significant deferred maintenance and owners association reserves that were inadequate.

These new procedures could impact purchases and future refinances as Freddie and Fannie purchase mortgages from lenders. So, it is important for consumers to be aware.

SCR310/300 helps manage this issue with the FINANCING CONTINGENCY and DUE DILIGENCE.

So, recommend parties talk to their lawyers asap if they want to know more about this issue and or may be considering using CASH (no SCR310/300 financing contingency) or AS IS (no SCR310/300 due diligence).

Consumers may want to investigate the soundness of the real estate, improvements, common ownership areas, subject property, and owners association either prior to contract or during the due diligence period in SCR300/310.

NAR and SCR have heard reports of this issue causing problems closing deals on real estate with common ownership (e.g., condos, townhouses).

NAR and SCR have heard of owner associations refusing to complete lender required questionnaires on significant deferred maintenance that may cause problems closing deals on real estate with common ownership (e.g., condos, townhouses).

NAR reports working on this issue which is impacting deals across the USA.

NAR and SCR request that any members facing this issue in their deals, to please send a report of your situation to help the association staff who help solve regulatory problem issues to be better able to help solve the regulatory problem.

From NAR:

Update – Fannie Mae To Require Proof of Safety Reviews and Reserving

Executive Summary:

  • Fannie Mae issued temporary changes that will require lenders to provide detailed architectural and safety verifications of a buildings safety and will not back properties with significant deferred maintenance
  • Fannie Mae will not allow waivers for a reserve study in lieu of the 10% minimum on new projects
  • Changes go into effect January 1st, 2022.

On October 13th, Fannie Mae announced temporary changes to its underwriting policies that govern the purchase of mortgages backing condominiums. The changes were in response to the tragedy in Surfside, Florida where half of the Champlain Towers Condominium collapsed killing 98 people and injuring many more. Engineering reviews revealed that the properties’ structure had degraded over time and was in need of repairs, while the association had insufficient reserves for the needed repairs.

The crux of the announcement is that Fannie Mae will not purchase mortgages on condominiums that have, "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". Lenders will need to verify and provide, "satisfactory engineering or inspection report, certificate of occupancy, or other substantially similar documentation that shows the repairs have been completed in a manner that resolves the building’s safety, soundness, structural integrity, or habitability concerns".

Furthermore, any due or recently paid special assessment will be reviewed and Fannie Mae is suspending the ability of associations to use a special reserve study in place of its 10% minimum reserve requirements. Communities may request a waiver, so long as they are not a new project.

Fannie Mae indicated that it expects the impact to be relatively small and isolated. However, the impact could be larger in Florida where state statute allows for associations to waive reserving requirements. The result of the change will make it more difficult to sell properties in projects where the association has not updated financials, reviews or reserving.

As seller’s agent, compiling these documents as part of the sales process would be a value add in this market and help signal and smoother sale to buyers’ agents.

Freddie Mac follows Fannie Mae in Requiring Enhanced Safety Documentation for Condos

Last week, Freddie Mac announced new, temporary project/community requirements for loans on condos it buys/finances from lenders. These changes will be implemented on February 28th and may slow some transactions in condo projects.

The requirements are intended to guarantee the safety of projects/buildings and avoid unforeseen assessments. These requirements follow similar changes from Fannie Mae that we alerted you to earlier this month in the wave of the Surfside building collapse.

Freddie Mac will require lenders to provide documentation to demonstrate that projects are not in critical need of repairs and do not require special assessments. These temporary requirements apply to all projects with five or more units. Documentation may include buy is not limited to:

  • Homeowners association (HOA) or cooperative board meeting minutes
  • Engineer’s reports
  • Reserve studies
  • List of necessary repairs provided by the HOA, Cooperative Corporation or management company, and
  • Other substantially similar documentation

Critical repairs do not include:

  • Routine Repairs and Maintenance, as defined above, and
  • Damage or deferred maintenance to one or a few units in the project, provided that there is no impact to the overall safety, soundness, structural integrity, or habitability of the improvements

Regarding special assessments, the seller must determine:

  • The reason for the special assessment
  • The total amount assessed
  • For current special assessments, the total amount is an appropriate allocation or, for planned special assessments, there is adequate cash flow to fund the reason for the special assessment, and
  • For current special assessments, the amount budgeted to be collected year-to-date has been collected

Freddie did not change their reserve requirements for projects. They currently require a 10% reserve or a fully funded reserve based on a recent reserve study.

Combined, Fannie Mae and Freddie Mac finance nearly half of all mortgages. Lenders can originate the loans and have a short window within which to provide the documents and then sell the loan to Freddie Mac. Not all projects or borrowers are eligible for FHA financing and private financing may be more expensive.

For REALTORS this means that your seller-clients or you may be asked for this information even though it is the lender’s responsibility. Requesting the documentation from your HOA or management company early may help to speed up the transaction.

Posted by: Byron King on 03/21/22 (This information is only accurate as of 03/21/22. You must contact SCR for updates and changes to this information after 03/21/22 as laws and regulations may change over time. SCR 803-772-5206 or email info at screaltors.org or email byron at screaltors.org)

This information is not legal advice. This information is intended only to provide general information and may not be relied upon as specific legal guidance. Legal counsel should always be consulted before acting in reliance on this information.