Cohousing-L Mailing List: New Standards for Fannie May and Freddie Mac Backed Mortgages

[Sharon Villines (sharon]

This is the latest update from the Community Associations Institute (CAI) legal 
advocacy blog. New rules are in effect September 18 for condominiums and other 
multi-household common interest owner associations to qualify for mortgages 
backed by Fannie May and Freddie Mac. Since they back 70% of all mortgages in 
the US it can be important for a cohousing community to be approved.

It’s been a long time since I’ve read these requirements but the Reserve 
requirements seem to be much more specific than in the past. I included the 
whole CAI post but also wanted to highlight some snippets up front that have 
been discussed here in the past. Not all are new but they seem more specific 
somehow. 

> The _mortgage lender_ must verify each project is satisfactory. 
> 
> A project will likely be deemed ineligible if:
>    • The project needs critical repairs.
>    • There is a current evacuation order due to unsafe conditions.
>    • There are unfunded repairs totaling more than $10,000 per unit.
>    • The property insurance coverage is not full replacement value and 
> doesn’t include all the coverage as required. (Note: cash value replacement 
> is unacceptable)
>    
> Association’s budget must include:
>    • Adequate funding for insurance deductibles
>    • At least 10% of the budget must be for reserves.
>    • No more than 15% of owners are more than 60 days delinquent in paying 
> their assessments.
>    • Commercial space may not be more than 35% of the total above and below 
> grade square footage is used as commercial or non-residential space, the 
> project is ineligible.
> 
> The lender must obtain a copy of the reserve study. The reserve study 
> generally must include:
>    • An inventory of major components of the project.
>    • Financial analysis and evaluation of current reserve fund adequacy.
>    • Proposed annual reserve funding plan.
>    • Financial analysis must validate that the recommended reserve funds 
> provide financial protection comparable to Freddie Mac’s standard.
>    • The annual reserve funding plan must meet or exceed the study’s 
> recommendation and conclusion.
>    • Most current reserve study (or update) must be dated within 36 months
>    • Must be prepared by an independent expert
>    • Must meet or exceed requirements in applicable state statutes.
>    • Must comment favorably on the project’s age, estimated remaining life, 
> structural integrity, and the replacement of major components.
>    • The project’s budget must contain appropriate allocations to support the 
> costs identified in the study.
>    • The lender must maintain and retain in the mortgage file a copy of the 
> reserve study, and perform their own analysis.
> 
> The master property insurance policies must cover full-replacement value (not 
> cash value) of the project/building.


This is an update from the CAI Advocacy Blog.

Fannie Mae and Freddie Mac New Lender Requirements Go Into Effect in September
By Dawn Bauman, CAE on Sep 1, 2023

In July, Fannie Mae and Freddie Mac released updates to project eligibility 
standards for condominiums and housing cooperatives.
A project refers to a condominium, housing cooperative, or any multi-family 
common interest ownership association with more than five attached units.

Project standards are specific requirements outlined by Fannie Mae and Freddie 
Mac. The mortgage lender must verify each project is satisfactory. Fannie Mae 
and Freddie Mac purchase loans from mortgage lenders so lenders have access to 
capital, and can provide mortgages to more homebuyers.

Fannie Mae and Freddie Mac are the financial engine for home mortgages in the 
U.S. As of 2023, Fannie Mae and Freddie Mac support around 70 percent of the 
mortgage market, according to the National Association of Realtors. Most 
conventional loans offered by private lenders end up being backed or purchased 
by Fannie Mae or Freddie Mac.

It is critically important for condominium and housing cooperative buildings 
(projects) to have access to loans that will meet the Fannie Mae and Freddie 
Mac qualifications. CAI continues to provide specific feedback to Fannie Mae 
and Freddie Mac regarding the requirements to make sure they are achievable by 
most condominium and housing cooperative projects and ensure mortgage lending 
availability. These Fannie Mae and Freddie Mac requirements officially go into 
effect Sept. 18. However, mortgage lenders may implement the practices 
immediately.

Boards of directors and managers will likely see these changes arise in lender 
questionnaires and requests from lenders for additional documentation including:
   • Insurance policies
   • Budgets
   • Financial Reports
   • Reserve Studies and Funding Schedules
   • Documentation regarding special assessments, if applicable
   • Documentation about litigation or ADR, if applicable
   • Building Inspection Reports, if available

When lenders ask community association boards and/or managers to complete 
questionnaires, they will also be asking for the documentation referenced 
above. If the community association does not provide this information to 
lenders as requested the project may be deemed ineligible, and Fannie Mae may 
put the condominium project on an ineligible list for lending. Because Fannie 
Mae and Freddie Mac back so many mortgages in the U.S., this could be 
devastating for a condominium or housing cooperative association.

A link to the full standards is below. This post provides highlights for 
established condominium and housing cooperative projects. Here are several 
highlights to help prepare you, your community, and your community clients:

A project will likely be deemed ineligible if:
   • The project needs critical repairs.
   • There is a current evacuation order due to unsafe conditions.
   • There are unfunded repairs totaling more than $10,000 per unit.
   • The property insurance coverage is not full replacement value and doesn’t 
include all the coverage as required. (Note: cash value replacement is 
unacceptable)
   • Association’s budget must include the following:
       • Adequate funding for insurance deductibles
       • At least 10% of the budget must be for reserves.
       • No more than 15% of income comes from rental or leasing of commercial 
parking facilities.
   • No more than 15% of owners are more than 60 days delinquent in paying 
their assessments.
   • Commercial space may not be more than 35% of the total above and below 
grade square footage is used as commercial or non-residential space, the 
project is ineligible.

Reserve Study and Funding Schedule

The lender must obtain a copy of the reserve study. The reserve study must 
comply with specifics. The reserve study generally must include:
   • An inventory of major components of the project.
   • Financial analysis and evaluation of current reserve fund adequacy.
   • Proposed annual reserve funding plan.
   • A reserve study’s financial analysis must validate that the project has 
appropriately allocated the recommended reserve funds to provide the 
condominium project with sufficient financial protection comparable to Freddie 
Mac’s standard budget requirements for replacement reserves.
   • The reserve study’s annual reserve funding plan, which details total costs 
identified for replacement components, must meet or exceed the study’s 
recommendation and conclusion.
   • The most current reserve study (or update) must be dated within 36 months 
of the seller’s determination that a condominium project is eligible (see 
Section 5701.2(a)(3)).
   • The reserve study must be prepared by an independent expert skilled in 
performing such studies (such as a reserve study professional, a construction 
engineer, a certified public accountant who specializes in reserve studies or 
any professional with demonstrated experience and knowledge in completing 
reserve studies).
   • The reserve study must meet or exceed requirements set forth in any 
applicable state statutes.
   • The reserve study must comment favorably on the project’s age, estimated 
remaining life, structural integrity, and the replacement of major components.
   • If the mortgage lender relies on a reserve study that meets the 
requirements of this section, the project’s budget must contain appropriate 
allocations to support the costs identified in the study.
   • The lender must maintain and retain in the mortgage file a copy of the 
reserve study. The lender also must perform an analysis of the study and retain 
this analysis.

Building Inspection Reports If there is a structural or mechanical inspection 
report completed within the last three years, the lender must obtain a copy and 
review the report. If the report indicates an evacuation order, unaddressed 
critical repairs, or other habitability concerns, the project 
building/association will be deemed ineligible.

Insurance Requirements

There are very specific insurance requirements including master property 
insurance policies that cover full-replacement value (not cash value) of the 
project/building. Here is a link to the full insurance requirements. If the 
project does not have adequate insurance, it will be deemed ineligible.

Litigation

A project in which the association is named as a party to pending litigation or 
the lender discovers the association is a part to an Alternative Dispute 
Resolution (ADR) proceeding such as arbitration or mediation, or the project 
developer is named as a party to ending litigation, or the lender discovers the 
developer is a party in an ADR proceeding, in either case, the dispute relates 
to the safety, structural soundness, functional use or habitability of the 
project, the project is deemed ineligible.

If the lender determines the pending litigation or ADR involves only minor 
matters that do not affect the safety, structural soundness, functional use or 
habitability of the project, the project is eligible if the litigation or ADR 
proceeding is limited to one of the following:
   • The litigation amount is known, the insurance company has committed to 
provide the defense, and the litigation amount is covered by the insurance 
policy.
   • The litigation amount is unknown, the seller has documented the mortgage 
file with a copy of the complaint, or the most recent amended complaint, and 
with an attorney letter that supports the seller’s determination that the 
litigation involves minor matters. The attorney letter must state: (i) the 
reason for the litigation; (ii) that the insurance company has committed to 
provide the defense; and (iii) that any potential monetary judgment against the 
HOA or settlement with the HOA, including punitive damages, will likely be 
covered by the HOA’s insurance policy. If the attorney indicates the matter 
will not likely be covered by the HOA’s insurance policy, then the project is 
ineligible.
   • The matter involves:
       • A non-monetary neighbor dispute or right of quiet enjoyment, whether 
litigated or in an ADR proceeding, or
       • A dispute in which the HOA is the plaintiff in a foreclosure action or 
action for past due HOA assessments, or
       • A dispute in which the HOA is the plaintiff in the litigation or a 
party to an ADR proceeding and is seeking reimbursement for expenditures made 
to repair the project’s component(s). The expenditures may have included items 
that related to the safety, structural soundness, functional use, or 
habitability of the project, provided that the repair permanently resolved the 
defect or issue, and the expenditures did not significantly impact the 
financial stability or future solvency of the HOA.
   • The estimated or known amount in dispute in the litigation or ADR 
proceeding is not expected to exceed 10% of the project’s funded reserves if 
use of the project’s funded reserves to pay for project litigation or dispute 
resolution does not violate the applicable jurisdiction’s laws and regulations.

Find this information and much more in these links:

Freddie Mac Lender Bulletin 
https://guide.freddiemac.com/app/guide/bulletin/2023-15
Fannie Mae Lender Bulletin 
https://singlefamily.fanniemae.com/media/36376/display

Community Associations Institute
6402 Arlington Blvd Ste 500
Falls Church, Virginia 22042

703-970-9220
www.caionline.org