In the wake of the tragic collapse of the Champlain South Tower in Surfside, Florida, Fannie Mae has announced that it will no longer back mortgages of people trying to buy condominium and/or co-op units in certain buildings with aging infrastructure and significant deferred maintenance. On October 13, 2021, Fannie Mae issued Temporary Requirements for Condo and Co-Op Projects, significantly impacting loans secured by units in condominium and co-ops. The temporary requirements address the structural and financial health of buildings, mandating an in-depth review of conditions regarding safety, soundness, structural integrity, or habitability to determine whether a property is eligible for a loan. While these new temporary requirements arise out of the concern for residential buildings with aging infrastructure and significant deferred maintenance, the new measures will inevitably have a chilling effect on condominium and co-op sales, as hundreds of properties will be deemed ineligible for loans.
More than ever, lenders are requiring thorough review of association records, including meeting minutes and inspection reports to obtain information about maintenance or construction that may have a significant impact on safety, soundness, structural integrity, or habitability of the property, as well as the financial strength of the association. Effective January 1, 2022, 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, and will remain ineligible until the required repairs have been made and documented. Fannie Mae defines “significant deferred maintenance” to include 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 (7) 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.
Further, properties that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are not eligible. Currently, in Miami-Dade and Broward Counties alone, there are hundreds of buildings that are due for their 40-year or 50-year recertification that will be affected by Fannie Mae’s temporary requirements. Indeed, in the wake of the Champlain South Tower collapse, many municipalities across Dade and Broward Counties performed building audits, cracking down on those buildings overdue for recertification. Under the new temporary requirements, owners and purchasers at these properties will be ineligible for loans.
The temporary requirements may also adversely affect newer projects that are undergoing their turnover process and associated construction defect litigation will also be affected. It is common for litigation involving new construction projects to identify structural and design defects. However, an unintended consequence of such litigation is that the owners and purchasers of newer construction projects may be unable to obtain financing, as repairs associated with construction defect litigation matters are often deferred until the end of the litigation.
Fannie Mae will also require a thorough review of current or planned special assessments to determine acceptability, noting the reason for the special assessments, the total amount assessed and repayment terms, and more important, documentation to support no negative impact to the financial stability, viability, condition and marketability of the project. Lenders must be able to confirm that an Association has the ability to fund repairs. Moreover, as to any special assessments related to safety, soundness, structural integrity, or habitability, Fannie Mae is requiring that all repairs be fully completed. Given that repairs associated with 40/50-year recertifications and/or new construction defect claims often take several years to complete, such properties may be ineligible for loans for the foreseeable future. It is imperative that buyers obtain information as to the financial and structural health and stability of prospective properties. At the same time, associations must become proactive in addressing maintenance issues and providing adequate reserves.
Fannie Mae’s temporary requirements also address association reserve requirements, noting that it is best practice for Associations to obtain a reserve study, keep it updated, and follow its recommendations for reserves and maintenance schedules. However, Fannie Mae notes that properties that budget less than 10% of their assessment income may be at increased risk for significant deferred maintenance and special assessments. In the past, lenders were able to obtain a reserve study in lieu of the condominium meeting the 10% budget reserve requirement. However, under the new temporary requirements, new projects that do not meet minimal reserve requirements will not be deemed eligible for loans.
The new temporary requirements will make many properties ineligible for loans, which may in turn, make it difficult to purchase and sell condominium and co-op units, possibly affecting property values. Like lenders, insurers are also revisiting their practices, and may be moving towards increased requirements related to reserve and maintenance for associations. Associations will need to strongly consider changing their reserve and maintenance practices to ensure their future viability and preserve their property values.
Carolina Sznajderman Sheir is an AV Preeminent® rated attorney and partner at Eisinger Law. She focuses her practice on real estate law, community association law, commercial litigation and developer representation and can be reached at 954-894-8000 x 238 or csheir@eisingerlaw.com.
Eisinger Law., is a full service Florida law firm focusing on community association law, real estate law, developer representation, commercial litigation, insurance law, estate planning and probate. For more info visit eisingerlaw.com.
