In a new lender letter to all single-family sellers, Fannie Mae recently detailed the temporary requirements to support the ongoing viability of condo and co-op projects in damaged areas.

In the wake of the tragic collapse of the Champlain South Tower in Surfside, Fla., residential buildings with aging infrastructure and significant deferred maintenance are a growing concern across the nation. This concern is expected to increase over the next decade as the majority of residential condo and co-op buildings were built more than 20 years ago. Lenders and other industry stakeholders have asked for clear guidance on how to manage emerging risk related to residential projects, according to Fannie.

“In response to the concerns about projects with significant deferred maintenance, we are issuing temporary requirements that impact the eligibility of condo and co-op projects containing attached units,” Fannie Mae said in its LL-2021-14. “These requirements apply to all loans secured by units in projects with five or more attached units, regardless of the type of project review or review waiver.

“Unless otherwise noted below, these requirements are effective for whole loans purchased on or after Jan. 1, 2022 and for loans delivered into MBS pools with issue dates on or after Jan. 1, 2022 and will remain in effect until further notice,” Fannie added.

Loans secured by units in condo and co-op projects with significant deferred maintenance or in projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions are not eligible for purchase, the letter stated.

These projects will remain ineligible until the required repairs have been made and documented. Acceptable documentation may include a satisfactory engineering or inspection report, certificate of occupancy, or other substantially similar documentation that shows the repairs have been completed in a manner that resolves the building’s safety, soundness, structural integrity, or habitability concerns.

Significant deferred maintenance includes deficiencies that meet one or more of the following criteria:

• Full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time;

• The project has deficiencies, defects, substantial damage, or deferred maintenance that is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements;

  The improvements need substantial repairs and rehabilitation, including many major components; or impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.

  Additionally, Fannie Mae added, projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are not eligible These policies do not apply to routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property. Also, 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 improvements then these project eligibility requirements do not apply.

  Examples of this scenario include water damage to a unit due to a leaky pipe that is isolated or damage from a small fire impacting the interior of a specific unit. However, if the subject property unit is affected, our standard requirements for property condition apply.

  Any current or planned special assessment, even if paid in full for the subject unit, must be reviewed to determine acceptability.

  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; and
• Borrower qualification with any outstanding special assessment payment.

Fannie also emphasized in the LL-2021-14 that the lender is expected to obtain the financial documents necessary to confirm the association has the ability to fund any repairs. 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.

“We are changing the status of projects in Condo Project Manager (CPM) to ‘Unavailable’ when we become aware of projects that do not meet these temporary eligibility requirements or that do not meet our standard Selling Guide requirements for project eligibility,” Fannie Mae outlined in the letter. “Effective immediately, loans secured by units in any project with a CPM status of ‘Unavailable are ineligible for purchase, regardless of the project review process used in underwriting the loan. Lenders can check the status of a particular project by accessing CPM. If a lender has documentation to resolve eligibility issues for projects noted as unavailable in CPM, they are encouraged to submit that documentation for consideration using the CPM mailbox: [email protected]

“We are also suspending the Selling Guide flexibility that allows a lender to obtain a reserve study in lieu of the condo project meeting our 10 percent budget reserve requirement,” Fannie added. “Reserve studies are an important tool to help HOAs plan for future needs. It is best practice for HOAs to obtain a reserve study, keep it updated, and follow its recommendations for reserves and maintenance schedules. However, projects that budget less than 10 percent of the HOA’s assessment income may be at increased risk for significant deferred maintenance and special assessments. Lenders may submit exception requests to us through the Project Eligibility Review Service (PERS) process for established projects that do not meet our minimal reserve requirements but that have a reserve study demonstrating sufficient reserves. We will not consider such requests for new projects at this time.”

Effective immediately Project Eligibility Waivers (PEWs) will not be issued for significant deferred maintenance, failure to obtain a certificate of occupancy, failure to complete or pass a regulatory inspection, or projects subject to large special assessments as described above. Additionally, all new requests related to PEWs for project insurance policy deficiencies are suspended.

“As a best practice, the lender should review the past six months of a project’s HOA meeting minutes and obtain information about any maintenance or construction that may have significant safety, soundness, structural integrity, or habitability impacts on the unit or the project. References to items such as improvements, renovations, inadequate reserve funding, budget deficits, and negative cash-flows should be researched to determine if these items are related to deferred maintenance or other conditions that impact the safety, soundness, structural integrity, or habitability,” Fannie Mae said in the LL-2021-14. “We recommend that lenders review any available inspection, engineering, or other certification reports completed within the past five years to identify deferred maintenance that may need to be addressed. As a reminder, projects engaged in construction defect or other material litigation are ineligible.

“We are reminding lenders that their appraisers must document any special assessments or deferred maintenance that may impact the safety, soundness, structural integrity, or habitability of the unit or the overall project and its amenities. We have issued separate guidance about this to appraisers; lenders are encouraged to review the information on our website,” Fannie added.

Regardless of review type, projects must comply with all policies described in the Selling Guide, B4-2.1-03, Ineligible Projects, including when completing a Limited Review or an appraisal waiver is used. Using an appraisal waiver does not exempt the lender from completing the required project review. Additionally, relying solely on the appraisal to complete a project review is not recommended. The appraisal often does not have sufficient information for a lender to determine whether the project meets our eligibility requirements.

Finally, homeowners impacted by disasters, such as the recent condo collapse or other similar circumstances, may be eligible to use disaster-related servicing flexibilities as outlined in the Selling Guide, B2-3-05, Properties Affected by a Disaster and Servicing Guide, D1-3-01, Evaluating the Impact of a Disaster Event and Assisting a Borrower.