A rule change is afoot;
Associations with major deferred maintenance that has been inspected through the reserve study process or local government agencies stating major structural or mechanical repair are required will not be eligible for lending. Those with more extensive deferred projects may need to provide additional information and documentation for lenders.
Those with normal deferred maintenance projects will not be affected.
The underwriting changes were part of a response to the tragic condo collapse in Surfside, Florida, which killed many people who lived in the structure and nearly destroyed some of the nearby large skyscraper condo projects. A contributing factor to this tragedy was the HOA’s choice to ignore structural inspections that noted the soundness of the building.
Why this matters
Fannie Mae and Freddie Mac are by far the largest single-family mortgage buyers in the country; for perspective, these two entities purchase or guarantee about
The underwriting requirements and guidelines that they produce set the standards for documents used by all domestic mortgage lenders. When these two mortgage goliaths tweak their procedures, the entire mortgage market responds. Most private lenders model their internal guidelines to mirror Fannie Mae’s.
Although Fannie Mae and Freddie Mac indicate these changes are temporary, they do not mention an end date. This omission is causing many market professionals to anticipate that the changes may become permanent.
These changes sound troubling at first. But, once we carefully examine the lender letter (LL-2021-14) and the updated HOA cert form that Fannie Mae has created called the 1076 form, they are not as onerous. The updated standardized form that Fannie Mae released blends the requirements for both limited and full condo review questions. One outcome of the new form is improved transparency for all borrowers, sellers, and lenders.
Some alarmists are concerned that these changes will require additional work and more documentation for the HOA’s and lenders. However, in reality, these changes are nothing new. Fannie Mae designed the HOA form 1076 and the questions around disclosure, decades ago. The revised 1076 form consolidates the info into one central document that is easier to review. One goal of the redesigned form is to provide more transparency for all parties.
What is the lender letter asking?
The Lender Letter (LL-2021-14) from Fannie Mae specifically asks for lenders to find out from an HOA the state the project, “…projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions.”
The letter continues if the project is undergoing major deferred maintenance. A project is defined as:
- A project or deficiencies that cause a building evacuation for more than 7-days or an unknown duration.
- A Condo that's in need of substantial maintenance that is severely impacting the safety or habitability.
- The repairs needed for the major components of the project and the need for repair are severe.
- The repairs needed to impede the safe and sound usage and functioning of the project’s major structural mechanical, and structural elements.
- The project has failed to achieve acceptable certificates of occupancy or pass local regulatory inspections or re-certifications.
The guidelines of the lender letter note that these do not apply to regular deferred maintenance projects. That said, the 1076 form still asks for additional information and disclosure concerning the non-major deferred maintenance projects. Providing the additional information on the 1076 form will eliminate the need for more documentation, for less severe deferred maintenance projects.
What other changes were noted in the lender letter?
The updated guidelines from Fannie Mae call for the disclosure of any special assessments to be included on the HOA cert form 1076. This is the same information the HOA management industry has provided for decades. The main difference is that now this information is noted on the HOA cert form for easy disclosure to the borrower.
Also, the updated guidelines specify that if the HOA is not allocating 10% to their reserve accounts, the budget may not be acceptable. In the past, the use of a reserve study was considered acceptable. With the new guidelines, this is unfortunately no longer the case. However, they do allow lenders to request a waiver on this issue directly from Fannie Mae. Although it should be noted that Fannie Mae waivers are applied for and not guaranteed to be approved as they are done on a case-by-case review.
What does this mean for sellers and HOAs?
These guideline changes will require management HOAs to fill out the new longer form. Fortunately, the questions on the new form are the same questions that they have used for decades. The difference is that now all of the questions are consolidated in one form.
If the project is going through major deferred maintenance, the HOA or HOA Management company could still be required to answer a few additional questions. These questions need to be answered anyway as part of required HOA disclosures.
HOA Management companies and sellers will need to work within their budget meetings to make sure their annual budgets meet the new requirements. Sellers would be well-served to stay up-to-date with information about their HOA’s and attend board meetings. HOA members participating in these meetings will help unit owners become savvier about the overall condition of the association.
What do these changes mean for lenders?
Lenders will need to use the updated HOA cert forms that contain the additional questions. The information on special assessments and deferred maintenance projects will be required regardless of limited or full review to do a loan backed by Fannie Mae and Freddie Mac.
Lastly, what do these changes mean for borrowers?
In a word, these changes mean more transparency for borrowers. No longer will condo buyers move into their units only to find construction crews unloading outside their homes. They should no longer be surprised to learn about a major maintenance project. Ideally, there will no longer be a surprise special assessment. An overarching goal of the changes is that borrowers will buy with more confidence.
