Introduction
In a significant shift towards transparency, Fannie Mae, the Federal National Mortgage Association, has recently announced that it will make its once-secret “Condo Unavailable Projects and Phases Report” accessible to the public. The decision to make this report publicly available reflects a broader industry trend towards transparency, acknowledging the pivotal role that information plays in empowering consumers and fostering a healthy housing market. Its counterpart Freddie Mac, meanwhile, will roll out new guidelines by early 2024 that will enable condos ineligible for financing to appeal their status.
By lifting the veil on previously undisclosed details about condo projects and phases, Fannie Mae aims to arm prospective homebuyers and community associations with comprehensive insights, enabling them to make more informed decisions about their investments.
The Key to Eligibility
To stay off Fannie Mae’s condo blacklist and Freddie Mac’s ineligibility list and qualify for lending, understanding the criteria is crucial. While the specific reasons for blacklisting are not explicitly outlined, it appears related to issues such as deferred maintenance, structural problems, or legal and financial troubles within the condo association.
Criteria for blacklisting include:
While the criteria for blacklisting a condo development are not explicitly stated, it appears that the criteria for blacklisting condos seem related to issues such as significant deferred maintenance, structural problems, or litigation/pre-litigation activity, reserve study requirements and special assessments.
No more than 15% of the total units in a project are 60 days or more past due in the payment of each special assessment. A condo project is ineligible if the HOA is receiving more than 10% of its budgeted income from non-incidental business arrangements related to the active ownership and/or operation of amenities or services available to unit owners and the general public.
- Projects in need of critical repairs are those needing repairs or replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s), or the financial viability or marketability of the project are ineligible. Critical repairs include conditions such as:
- material deficiencies, which if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year;
- any mold, water intrusions or potentially damaging leaks to the project’s building(s);
- advanced physical deterioration;
- any project that failed to pass state, county, or other jurisdictional mandatory inspections or certifications specific to structural safety, soundness, and habitability; or
- any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment).
If damage or deferred maintenance is isolated to one or a few units and does not affect the overall safety, soundness, structural integrity, or habitability of the project, then these requirements do not apply.
- Projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are not eligible. Notably, these eligibility criteria do not pertain to routine maintenance or repairs conducted by a homeowners’ association to preserve property integrity. Furthermore, if damage or deferred maintenance is confined to one or a few units without compromising overall safety, soundness, structural integrity, or habitability, the project is exempt from these eligibility requirements. Instances of such exemptions include:
- isolated water damage from a leaky pipe
- damage from a small fire limited to the interior of a specific unit
However, if the subject property unit is affected, standard requirements for property conditions will apply.
- Projects in which the HOA or co-op corporation is named as a party to pending litigation, there is prelitigation planned, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability, or functional use of the project are ineligible.
- Reserve fund must be adequate and a minimum of 10% of budget. All major components and elements of the project’s common areas for which repair, maintenance, or replacement is expected; the condition and remaining useful life of each major component; an estimate of the cost of repair, replacement, restoration, or maintenance of major components; an estimate of the total annual contributions required to defray costs (minus the existing reserves funded for this purpose), including inflation; an analysis of existing funded reserves; and a suggested reserve funding plan.
Fannie Mae also requires all condo lenders to determine whether the condominium association has imposed any special assessments. The lender must document the loan file with the following:
- The reason for the special assessment.
- The total amount assessed and repayment terms.
- Documentation to support no negative impact to the financial stability, viability, condition, and marketability of the project.
- Confirmation that the borrower will still qualify for the loan with any outstanding special assessment payment.
If the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed, or the project is not eligible. Additionally, if the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.
Fannie Mae’s Pledge to Transparency
Fannie Mae is set to launch a web-based tool in 2024, offering insights into eligible and ineligible condominium projects. This tool will empower homeowners’ associations by providing guidance on making projects eligible, reinforcing Fannie Mae’s commitment to transparency and accountability.
Freddie Mac will introduce enhancements late this year and in early 2024 that provide “greater certainty” as to whether a loan to finance a condo unit meets Freddie Mac’s guidelines, the email said. The enhancements “will also allow homeowners associations greater clarity with respect to their project’s eligibility process, as well as introduce a new appeal process when projects are determined to be ineligible,” it added.
Implications for Homeowners
Freddie Mac, the Federal Home Loan Mortgage Corporation, echoes Fannie Mae’s commitment to transparency. The unveiling of the condo blacklist ensures borrowers are aware of eligibility criteria, impacting a significant portion of potential homeowners. Condominium developments pose unique risks to mortgage lenders, and Fannie Mae’s decision reflects a commitment to mitigating these risks for a stable housing market. However, unlike Fannie Mae, Freddie Mac does not distribute a “blacklist” but designates properties that are ineligible for financing on a web app used by lenders.
Conclusion
The Federal Housing Finance Agency (FHFA) has stated its support for a transparent process that provides visibility for loan originators and the homeowners associations responsible for managing and maintaining condo projects. Fannie Mae’s decision to make its condominium blacklist public marks a positive step towards transparency in the mortgage industry. Homeowners, HOAs, and real estate professionals can now access crucial information about the eligibility of their projects, fostering a more informed and empowered community. As we await the launch of the web-based tool in 2024, it is evident that the landscape of condominium financing is undergoing a transformative shift, benefiting homeowners and stakeholders alike.
Rita Khan is the Digital Marketing Manager at Hirzel Law. Ms. Khan received her Bachelor of Arts in American Culture from the University of Michigan, Master of Business Administration with a focus on Business Intelligence from Baker College, Paralegal Certificate from the University of Michigan Flint – Center for Legal Studies, and Graphic Design Certification from the New York Institute of Art and Design. Ms. Khan has over 15 years of experience in the property management industry from residential real estate, student housing, and condominium & HOA management. Ms. Khan holds several designations and certifications such as Certified Manager of Community Associations (CMCA), Association Management Specialist (AMS) and Professional Community Association Manager (PCAM) from the Community Associations Institute (CAI), Accredited Residential Manager (ARM), Accredited Commercial Manager (ACoM), and Certified Property Manager (CPM) from the Institute of Real Estate Management (IREM), Certified Apartment Manager (CAM), Certified Apartment Portfolio Supervisor (CAPS), and Certified Apartment Supplier (CAS) from the National Apartment Association (NAA), Project Management Professional (PMP) from the Project Management Institute, Certified ScrumMaster (CSM) from Scrum Alliance, Professional Certified Marketer Marketing Management (PCM) from the American Marketing Association and Certified Digital Marketing Professional (CDMP) from the Digital Marketing Institute. She is a licensed Michigan Real Estate Salesperson, Broker and Notary Public. Ms. Khan is also a Real Estate Property Management faculty member at Schoolcraft College where she teaches Introduction to Property Management and Residential and Commercial Property Management. Ms. Khan currently serves as the Chair of the CAI-Michigan Social Media Committee and is an active member of the Institute of Real Estate Management (IREM), where she serves as a member of the IREM Foundation Board of Directors, NextGen Advisory Committee, and a member of the Board of Directors for the IREM Michigan Chapter. Ms. Khan has previously served as a Delegate Member on the CAI Michigan Legislative Action Committee. She may be reached at (248) 986-2290 or rkhan@hirzellaw.com.
