The Dawn of a New Reality in Condominium and Co-operative Lending

This piece originally appeared in the June 2022 edition of MReport magazine, online now.

In January 2022, Fannie Mae’s new condo and co-op loan guidelines brought big changes to how condo and co-op loans should be underwritten. Freddie Mac followed suit soon after in February. In just a few months, these sweeping changes in the way lenders must now appraise condominium and co-op properties before making loans on condo and co-op units have had a significant impact on the availability of mortgages and the responsibility of the members of the board of directors.

Lenders were aware of the changes to condo and co-op lending as early as October 2021. However, it was impossible to understand the impact of these measures. Today, we have a much better idea of ​​the new reality that is emerging in the area of ​​condominium and cooperative loans. In short, what was difficult has become a little more difficult.

Why this happens
New GSE guidelines require quasi-forensic examination of structural stability, mechanical components, deferred maintenance of these components, and special appraisals in every condominium or cooperative building where a mortgage is granted. This is of course in addition to the normal screening that condominium/co-op properties must undergo to be considered “secured” for the loan.

This heightened surveillance by the GSEs is a direct result of the tragic collapse of the Champlain Towers condominium in the Miami suburb of Surfside, Florida. As we now know, the board members of this building continued to throw the proverbial “Maintenance Can” on the road for over 20 years.

So how did this happen?

Repair and maintenance work was postponed year after year by newly elected council members after council members because no one wanted to increase maintenance costs for the owners of the building. As shocking as it sounds, it’s the same mindset among thousands of condo and co-op board members across the country.

It’s not a piece of ax on condo and co-op boards. I have seen many thoughtful, caring and responsible board members make very difficult decisions that have had a financial impact on hundreds of owners.

But no two buildings or condo/co-op boards are alike. Among the decision makers responsible for many condo and co-op boards are members who were elected solely to keep maintenance costs low.

Condo and co-op projects face other familiar challenges that are ultimately impacting lenders, especially given new GSE lending guidelines.

Judgment Day
The problem with keeping maintenance costs low and mechanical and structural components not being repaired is that repair costs often increase over time. As a result, condominium and co-op boards that have not been diligent in performing routine maintenance and repairs tend to have higher repair costs that accrue in the future. . It’s not uncommon, in fact, for a minor roof leak to turn into a major structural problem down the line.

Over the past 30 years of my career, I have consulted with thousands of condo and co-op boards. During this time, I’ve heard countless problematic comments that are far from unique or unusual:

  • “We’re not putting any money aside because I won’t be alive when the repairs are finally done.”
  • “A lot of our unit owners are selling their units over the next five years – we’ll just let the new board handle that.”
  • “If repairs need to be done in the future, we will simply create a special assessment.”
  • “We don’t care if people can get mortgage financing in our building. If people can’t buy their unit with cash, they shouldn’t live here.
  • “Nobody gets Fannie Mae/Freddie Mac/FHA loans in this building. The average sale price is much higher than the agency’s loan limits allow.
  • “Why don’t we produce the same $150,000 that we have in reserve? Remove it from one account, add it to another, and pretend we’re following the directive.

Suffice it to say that the issues involved in maintaining condo and co-op projects are extremely complex, even at the best of times. So, let’s discuss how to simplify these issues.

just the facts
Here are three basic facts about condo and co-op loans in 2022. No matter what you or I think of them personally, they present the truth about where we are today:

  • Fannie Mae and Freddie Mac’s new lending guidelines aim to ensure homeowners are made aware of potential structural and mechanical issues in buildings they own or purchase units in.
  • All condo and co-op loans have been affected by the release of these guidelines. This includes Conforming Agency Mortgages, Jumbo Mortgages, Co-op Underlying Mortgages, and Condominium Lines of Credit.
  • To make mortgage financing available to borrowers in condos and co-ops, property managers and board members must immediately do several things: adopt new reserve financing policies, abandon the special appraisal method of financing repairs , complete necessary structural and mechanical repairs, and obtain an engineering inspection and/or reserve survey to determine component condition and capital requirements.

So how do lenders ensure these things are accomplished?

It won’t be easy. But there is one general rule we see emerging that can at least help lenders see the bigger picture.

The 70/20/10 Loan Compliance Rule
On average, our team is involved in reviewing over 2,000 condominiums and cooperative properties per month. As we carry out these reviews, some clear distinctions emerge.

About 70% of condos and co-ops we review meet the new lending guidelines. This 70% share of these compliant properties is easily financed, and there are abundant resources for Fannie Mae, Freddie Mac and a jumbo mortgage financing portfolio available for them.

Being compliant means that these properties meet several key criteria, including establishing a reserve account with substantial capital to pay for future repairs and replacement of mechanical and structural components of common areas.

Compliant properties also have a Reserve Study or Technical Study completed within the last 36 months which is available for review. This ensures that board members and property managers are informed of the status of various components, that reserves are properly collected in an annual operating budget, and that future repair and replacement costs are collected to avoid future appraisals. specials. Compliant properties also have a baseline questionnaire that has been completed for the property that addresses new questions that GSEs require to be answered, either by attaching an updated reserve study, engineer’s report or equivalent for exam.

About 20% of the condominium and co-op properties we review do not initially comply with the new lending guidelines, but could be brought into compliance with a little effort. Generally, these properties meet some of the criteria set out in the new guidelines, but require additional information to be reviewed to determine the warranty.

For example, properties that fall into this category may not have confirmation that a 10% reserve line item appears in the operating budget and that the condo/co-op has raised capital for future repair of structural or mechanical components. . They may also have a special appraisal in place for a major mechanical or structural repair, but the work has already been completed. In some cases, the board of directors of the condominium or cooperative do not want to answer questions regarding deferred maintenance of structural and mechanical components on the questionnaire, but they have an engineer’s report and a reserve study that they provide that can help clear things up.

Overall, this 20% of all condominiums and co-ops have more limited access to mortgage financing and require additional monitoring or compliance. Access to portfolio mortgage financing is often possible, but access to conforming loans is more difficult.

The final 10% of condominium and co-op properties we review do not meet the new lending guidelines and have serious issues that will prevent nearly all lending on the property unless the issues are corrected. For example, the property may have an operating budget that does not have a reserve contribution listed, or there is a reserve account, but it has very minimal accumulated capital.

There may be a special levy in place to fund the repair of a major mechanical or structural component, but the repair is not yet complete.

Some of the most serious problems with these properties include several components that have not been properly maintained or replaced and suffer from deferred maintenance. A property may even have a violation that describes an unsafe condition that may impact the livability of the property.

For approximately 10% of condominium/co-op properties reviewed, access to mortgage financing is incredibly difficult to obtain, and getting Fannie Mae/Freddie Mac approval is simply not possible.

Only in unique circumstances can portfolio loans be offered on these types of properties, and when they do, borrowers are typically offered much higher interest rates with much higher LTVs. weak.

The essential
Ultimately, there is no longer any way for a condo or co-op to operate without setting aside sufficient capital for component repairs. If they don’t follow the new guidelines, funding won’t be available… period. Now, buildings must obtain professional component assessments, set aside appropriate funds for future major repairs, and complete repairs to components whose maintenance has been delayed or neglected. For many condo and co-op lenders, the best response to this new reality will be to seek outside expertise to help them.

Otherwise, we can only hope that the new reality created by the GSE guidelines – difficult as they are – will usher in a new era of more transparent, proactive and safer condo and co-op ownership.

If so, the work we put into it will be worth it.

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