The collapse of the Champlain Towers South in Surfside, Florida, in June 2021, sent shockwaves throughout the United States and was a wake-up call to condominiums to the dangers of aging infrastructures. In light of this tragic event, secondary mortgage market giants, Fannie Mae and Freddie Mac have issued bulletins advising of new “temporary” requirements for mortgages issued in connection with condominiums and cooperatives.
Put simply, Fannie Mae and Freddie Mac (officially known as the “Federal Home Loan Mortgage Company”) are quasi-governmental entities that were established by Congress to create a secondary market for residential mortgages. Neither entity issues or services their own mortgages, but rather purchases mortgages from originating banks to hold the mortgages or sell as mortgage-backed securities. This functions to provide liquidity to the residential mortgage market and acts as a guarantee to the originating banks and lenders.
Prior to the Surfside collapse, condominiums and cooperatives that were in litigation were deemed “ineligible projects” for the purposes of Fannie Mae and Freddie Mac eligibility. In practice, this meant that a unit owner seeking to refinance or a potential buyer seeking to obtain a mortgage on a unit would not be able to from traditional banks or lenders that seek to sell the mortgages on the secondary market, forcing them to opt for cash deals or to find a local lender that would hold and service the mortgage.
As a result of and following the Surfside collapse, Fannie Mae and Freddie Mac have issued bulletins regarding “temporary” additional requirements for mortgages obtained for condominiums and cooperative residential units. These new additional requirements could make it harder for unit owners to refinance or for new buyers to obtain mortgages. Below is a summary of the key temporary requirements that are being implemented in 2022:
Fannie Mae, Lender Letter (LL-2021-14)
On October 13, 2021, Fannie Mae issued Lender Letter (LL-2021-14) regarding “Temporary Requirements for Condo and Co-Op Projects.” Pursuant to LL-2021-14, “[l]oans 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 Lender Letter goes on to explain that “significant deferred maintenance” means projects that meet either 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;” and/or
- “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.”
Moreover, those projects that have failed to obtain a certificate of occupancy, or failed to pass a regulatory inspection or re-certification, such as those performed by the New Jersey Department of Community Affairs, will also be deemed ineligible.
The Fannie Mae “temporary” requirements apply to all condominiums and cooperatives with five or more attached units and went into effect for “whole loans purchased on or after January 1, 2022.” The new requirements will remain in place “until further notice.”
Freddie Mac Bulletin 2021-38
On December 15, 2021, Freddie Mac issued Bulletin 2021-38, which, like Fannie Mae Lender Letter (LL-2021-14), also places additional temporary requirements on residential mortgages sought for condominiums and cooperatives with five or more attached units. These temporary project review requirements apply to projects “in need of Critical Repairs” and to projects with special assessments.
Bulletin 2021-38 defines “Critical Repairs” as:
Repairs and replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building(s) and/or that impact unit values, financial viability or marketability of the project. These repairs and replacements include:
- All life safety hazards;
- Violations of any federal, state or local law, ordinance or code relating to zoning, subdivision and use, building, housing accessibility, health matters or fire safety;
- Material Deficiencies;
- Significant Deferred Maintenance
Any mortgage sought in a condominium or cooperative that is deemed in need of “Critical Repairs” will be ineligible for sale to Freddie Mac, meaning such mortgages cannot be sold on the secondary market. The determination of whether any given community is in need of Critical Repairs can be made through:
- board meeting minutes,
- engineering reports,
- reserve studies,
- list of necessary repairs provided by the homeowners’ association, Cooperative Corporation, or management company, or
- other similar documentation.
Once a community is determined to be in need of Critical Repairs, it will remain ineligible under the temporary requirements until the repairs have been completed and documented. Beyond Critical Repairs, communities will also be found ineligible if there are any special assessments, even if paid in full, that are determined to have been assessed because of or as a result of a Critical Repair, as defined in Bulletin 2021-38.
The Freddie Mac “temporary” project requirements will go into effect beginning on February 28, 2022. Currently, no end date has been announced.
As a result of both the Fannie Mae and Freddie Mac Temporary Requirements, communities will need to complete Form 476A, which is an addendum to Form 476 Condominium Project Questionnaire, to assist in the determination as to whether a given project/community meets the new temporary requirements subject to Fannie Mae, Lender Letter (LL-2021-14) and Freddie Mac Bulletin 2021-38.
What does this mean for your condominium or cooperative?
Ultimately, what does this mean for your condominium or cooperative? In short, if it is determined that your community has significant deferred maintenance and/or is in need of Critical Repairs, unit owners and potential purchases will not be able to obtain mortgages from traditional banks and lenders that seek to sell those mortgages on the secondary market.
Contact a Condominium or Cooperative Attorney
If you have any questions about how these new, temporary project requirements apply to your community, please do not hesitate to contact Stark & Stark. We are here to help your community.