Sharper Management


Evolving Lender Requirements Affect HOAs

In reaction to the tragic collapse of the Champlain Towers South condo building in Surfside, FL last summer, there have been significant changes to mortgage lender requirements with loans backed/purchased by Fannie Mae and Freddie Mac. A large portion of mortgage loans (estimated at nearly 50%) are typically purchased by Fannie or Freddie, so mortgage lenders will be diligent to ensure during their underwriting process that these requirements are satisfied. These requirements are purportedly “temporary,” but requirements for Fannie backed loans went into effective January 1st, while Freddie backed loans go into effect February 29th. The concerns brought on by the events in Florida are three-pronged: significant deferred maintenance, perceived or realized “unsafe conditions,” and the Association’s overall financial health. Who Does This Affect? Any Association legally recognized as a “condominium” or a “cooperative” with more than five units. The word “condominium” is important, as there are Associations that may be perceived as a “townhome;” however, they might be legally defined as a “condominium.” The word does not just apply to what one might envision as a high- or low-rise building. Check your Declarations and Articles of Incorporation for this definition and classification of your Association. What Are the New Requirements? Maintenance – The primary crux of this is an Association cannot have “deferred maintenance.” This is generally a difficult thing to define and may be difficult to prove the subjective adequacy of “maintenance.” One way to do so is to have an active Preventative Maintenance Plan in accordance with the Minnesota Common Interest Ownership Act (“MCIOA” or 515b) requirements passed in 2019. Reserve Study & Fund – Another way to illustrate proactive maintenance is to have a formal “reserve study” done, and then following the recommendations laid out in that study. Fannie and Freddie both require that 10% of operating budget goes to Reserves. (note: Fannie waives this requirement if a reserve study is in place and up to date). Details on Loans & Assessments – Fannie and Freddie will both require significant detail to be provided on Special Assessments or Association loans. Six months’ worth of Meeting Minutes may be requested, and specific details may be required in the resale disclosure and review process. Addendum to Resale Questioners – Fannie and Freddie both released the joint “Condominium Project Questionnaire” and a new Addendum to gather information required under the new lender requirements. As part of the resale disclosure process, this new Addendum asks specific questions of the association such as: When was the building last inspected by a licensed architect, engineer, or building inspector? Did the last inspection have any findings related to safety, soundness, structural integrity, etc.? Is there a Reserve Study and has it been updated in the past three years? Current or planned Special Assessments? What Should the Association Do Now? It would be wise for effected Associations to seek a legal opinion to review the above-mentioned areas of requirements for compliance. An “opinion letter” on file would be a helpful tool. In addition, a pre-filled-out Addendum would be helpful to have at the ready for when a resale disclosure package is requested. As the busy summer selling season gets into swing, there will be detailed requests coming in from buyers and sellers as it relates to these new requirements. It is best to get on top of it as soon as possible so the Association is ready. Finally, unless your Governing Documents state otherwise (which is extremely rare), it is important to remember that these are not requirements of the Association. These are new requirements of Fannie Mae and Freddie Mac. Associations generally have no obligation to confirm that there is no deferred maintenance, no unsafe conditions, no planned special assessments, or to verify that it is fiscally sound. However, the risk of liability should be weighed against buyers and sellers who could make claims that the Association was a deterrent to a resale transaction because financing fell through on account of Freddie/Fannie requirements.  Nevertheless, it would be a wise decision for any legally defined “Condominium Association” to consult with their attorney for a legal review.