The tragic collapse of the Champlain South Tower in Surfside, Florida has led to a series of new requirements that impact all Fannie Mae and Freddie Mac loans for the purchase of units in community associations that have five or more attached units
Citing concerns over buildings with aging infrastructure and significant deferred maintenance projects, condominiums, co-ops and homeowners associations will have to provide an extensive review of safety, soundness and structural integrity conditions to determine if a purchase of a unit in a community is eligible for funding. Since Fannie Mae and Freddie Mac acquire a significant majority of residential mortgages, these guidelines will have a significant effect on the sales of units in community associations.
Fannie Mae will no longer accept loans for units in properties with significant deferred maintenance or which have been directed to make repairs due to unsafe conditions.
“Significant deferred maintenance” does not include routine maintenance and repairs routinely performed to preserve the condition of the property. Rather, it focuses on critical repairs. Loans will not be available for units in such communities until acceptable documentation, such as engineer’s reports and Board meeting minutes, is provided that all necessary repairs are completed to the lender’s satisfaction.
Fannie Mae will also be requiring increased scrutinization of all current and planned special assessments.
The reasons behind these assessments, their amounts and terms and any additional documentation will be examined as well. If the special assessment is for matters involving safety, structural soundness or integrity, the lender will require that all such repairs be completed prior to providing a mortgage to a prospective home buyer.
Boards must also carefully review their budgets to make sure that they are complying with the requirement of maintaining a minimum 10% annual contribution to the reserve account. In the past, Fannie Mae waived this requirement if a community had a reserve study supporting a lower reserve contribution but this special accommodation is no longer available.
These new requirements only apply to community associations that have five or more attached units.
Communities that have free standing individual homes are not subject to these regulations. Further, if communities consist of both attached units and detached units, the regulations only apply to the attached units.
Form 1076 and Form 476 have been added as an Addendum to the Condominium Project Questionnaire. This Addendum seeks detailed information concerning building safety, soundness and structural integrity. The first question is “When was the last time the building was inspected by a licensed architect, engineer or other qualified inspector?” For many communities, the answer may be “never” or “unknown”. It is unclear if these answers will be an impediment to buyers receiving funding.
If an inspection has been conducted, additional explanations must be provided including a copy of the engineer’s report, a repair schedule, and a copy of Board minutes relating to the engineer’s report. If the Association does provide the requested information, however, it may want to shield itself from liability with a hold harmless agreement or a disclaimer that the responses are based on good faith and to the best of the Board’s knowledge.
Community Associations are not legally obligated to provide the information requested in this Addendum. However, failure to do so may hinder sales because purchasers may not be able to obtain financing.
Boards should consider consulting with engineers to avoid any disruptions that could have a negative impact on property values and sales. The impact of these regulations and their effect on the sale of units is developing and may become clearer as Community Boards begin submitting these new mortgage questionnaires.
