GSEs Introduce Temporary Safety & Soundness Review Requiments for Condos, Co-ops

April 25, 2022

Recently, we have received inquiries regarding Fannie Mae and Freddie Mac’s new safety and soundness project review requirements for condominiums and cooperative projects. Specifically, we have received questions concerning a lender’s obligations to obtain and review documentation related to these standards, both in general and in situations where the condo or co-op association refuses to complete the Condominium Questionnaire or to provide other requested documentation.

This memorandum provides a brief summary of the GSE’s temporary requirements. It also addresses a lender’s responsibilities to determine whether a project meets these requirements, including the type and sources of information and documentation a lender should evaluate to determine the project’s eligibility.

The GSEs Have Introduced Temporary Safety and Soundness Review Requirements for Condo/Co-Op Projects in Response to Growing Concerns About Aging Infrastructure and Deferred Maintenance

In response to concerns about the risk to residential buildings with aging infrastructure, tragically highlighted by the collapse of the Champlain Towers South in Florida, both Fannie Mae (LL-2021-14) and Freddie Mac (Bulletin 2021-38) have introduced temporary project review requirements that address potential safety and soundness issues of condominium or co-operative projects. The new requirements require a lender to determine whether a project has “significant deferred maintenance” (Fannie) or “critical repairs” (Freddie) which would make the loan ineligible for sale to the GSEs. The requirements apply to all condo/co-op projects with more than five units, regardless of the type of project review or review waiver.

Fannie’s temporary requirements apply to all loans purchased on or after Jan. 1, 2022. Freddie’s requirements are effective for loans with settlement dates on or after Feb. 28, 2022. Both GSE’s requirements will remain in effect until further notice.

Fannie and Freddie Have Provided Definitions of “Significant Deferred Maintenance” and “Critical Repairs”.

Under the temporary requirements, Fannie Mae will not purchase loans secured by units in projects with significant deferred maintenance or in projects that have received a directive from a governmental authority to make repairs due to unsafe conditions. Fannie defines “significant deferred maintenance” to 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, projects that have failed to obtain a certificate of occupancy or pass inspection or recertification are not eligible.

Similarly, under Freddie Mac’s temporary requirements, it will not purchase loans secured by units in projects in need of critical repairs. Freddie defines “critical repairs” to mean 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 – i.e., unresolved problems that cannot reasonably be addressed by normal operation or routine maintenance; and
• Significant Deferred Maintenance – i.e., the postponement of normal maintenance, which cannot be reasonably resolved by normal operations or routine maintenance and which may result in:
  • Advanced physical deterioration
  • Lack of full operation or efficiency
  • Increased operating costs
  • Decline in property value

In addition to these new safety and soundness requirements, both Fannie and Freddie have modified their respective requirements for evaluating special assessments, and Fannie Mae has suspended its policy allowing for flexibility in meeting reserve requirements.

Lenders Must Review Special Assessments to Determine the Purpose of the Assessment and its Acceptability.

Under Fannie and Freddie’s new standards, a lender must review any current or planned special assessment, even if paid in full for the subject unit, to determine whether the assessment is acceptable under the GSE’s new requirements.

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.

In order to meet these new requirements related to 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; and
• borrower qualification with any outstanding special assessment payment.

The lender is expected to obtain the financial documents necessary to confirm the association has the ability to fund any repairs.

Freddie also requires a lender to determine that the amount budgeted to be collected year-to-date (YTD) has been collected by reviewing an income statement or a substantially similar document which has YTD budgeted and actual amounts for the special assessment. The document should be dated within 90 days of the project review date, and any shortfall between the budgeted and actual YTD amounts for the special assessment must not be more than 5%.

Any documentation used to determine the eligibility of the special assessment, such as the income statement referenced above, must be retained and provided to GSE upon request.

Fannie Mae Will Now Generally Require a Condo Project Maintain a Minimum 10% Budget Reserve.

Fannie has also suspended its policy that allowed a lender to obtain a reserve study in lieu of the condo project meeting Fannie’s 10% budget reserve requirement. Fannie’s stated rationale for the suspension is that projects that budget less than 10% of the HOA’s assessment income may be at increased risk for significant deferred maintenance and special assessments. Fannie will allow lenders to submit exception requests through the Project Eligibility Review Service (PERS) process for established projects that do not meet the 10% minimal reserve requirements but that have a reserve study demonstrating sufficient reserves. However, Fannie will not consider such requests for new projects at this time.

Lenders Must Review the Appraisal, Condo Questionnaire, and other Relevant Documentation to Determine Whether a Project Meets the Temporary Safety and Soundness Requirements.

It is the responsibility of the lender to determine whether the project meets applicable GSE eligibility requirements, including the temporary safety and soundness requirements. Such a determination should be made by reviewing multiple sources of applicable information and documentation, including the appraisal, Condo Questionnaire, HOA minutes, financial statements, and relevant reports.

Documentation may be provided by the HOA itself, or obtained by parties with an interest to the transaction, including the real estate agent, seller, buyer, or unit owner. The GSEs do not recommend that a lender rely on a single source of information to determine whether significant deferred maintenance of critical repairs exist and their extent. In addition, Fannie Mae requires the lender to verify the project status in the Condo Project Manager.

Fannie Mae suggests it is a best practice to review six months of a project’s HOA meeting minutes as well as any available inspection, engineering or other certification reports completed within the past five years in order to identify deferred maintenance issues. Freddie Mac cites board meeting minutes, engineer’s reports, reserve studies, and substantially similar documentation as documentation that a lender should review in order to determine whether critical repairs are required.

The GSEs have also issued separate guidance to appraisers reminding them that all appraisals must document any special assessments or deferred maintenance that may impact the safety, soundness, structural integrity, or habitability of the unit or overall project and its amenities. A lender should always review the appraisal as part of the project review process, but the GSEs do not recommend relying solely on the appraisal. If the loan is eligible for an appraisal waiver, that does not exempt the lender from completing the project review.

Both GSEs also require lenders to review any special assessments to determine whether the assessment is related to safety, soundness, structural integrity, or habitability.

The GSEs have Updated the Condo Questionnaire to Assist Lenders in Evaluating the Project Against the Safety and Soundness Requirements.

In order to assist lenders in determining whether the project meets temporary GSE safety and soundness requirements, Fannie/Freddie have revised the Condominium Project Questionnaire (Form 476). The Questionnaire now contains an Addendum (Form 476A) that asks multiple questions relating to safety, soundness, and structural integrity. The use of the Condo Questionnaire Addendum is not mandatory. However, the information it solicits is considered to be the minimum level of information a lender must obtain to determine whether the project meets the temporary requirements. As discussed above, the lender is free (and encouraged by the GSEs) to use alternative sources of information to determine whether the project meets the temporary requirements if the responses to the Condo Questionnaire do not provide sufficient information to determine if the project meets the GSE’s temporary requirements.

The Failure of a Project’s Board or Managing Agent to Complete the Condo Questionnaire or Addendum Does not Automatically Make the Project Ineligible; Lenders May Review the Project’s Safety and Soundness Through Other Documentation.

We are aware of condominium projects where the board or managing agent refuses to complete some questions included in the Addendum, or in some cases complete the Addendum at all. Notably, some boards have objected to answering Question 3, which asks whether the board is aware of any existing safety and soundness deficiencies, and Question 5, which asks whether the board is aware of any anticipated future violations of ordinances or building codes related to safety and soundness. The stated concern is that the board may be exposing itself and the HOA to legal liability by answering “no” to these questions when a deficiency is later found or a violation assessed.

The fact that a condo association is unwilling to complete the Addendum does not relieve the lender of the requirement to determine the project’s safety and soundness. The Condo Questionnaire and Addendum are optional forms that are intended to assist lenders in evaluating projects. Fannie Mae’s Project Standards Requirements FAQ addresses lender responsibility when the condo association will not provide any information (including the Addendum) relating to safety/soundness or special assessments:

• What options are there if the association or property manager is not willing to provide information to confirm there is no significant deferred maintenance or information on special assessments?
• The lender may be able to obtain the information from parties that have an interest in the transaction: buyer, seller, real estate agent, or unit owner for a refinance. If the lender is unable to obtain the information to make the determination, loans on units in the project are not eligible for delivery to Fannie Mae.

If a lender is unable to obtain sufficient documentation from other sources to make a determination that the project meets the temporary safety and soundness requirements, then the GSEs consider the project ineligible, and loans secured by units in such projects may not be delivered to Fannie or Freddie.

If you have further questions about these new temporary safety and soundness requirements, please reach out to Peter Idziak or one of our other attorneys.

If you have questions regarding the contents of this alert, please let us know.

Allan Polunsky at Allan.Polunsky@mortgagelaw.com

Jay Beitel at Jay.Beitel@mortgagelaw.com

Marty Green at Marty.Green@mortgagelaw.com

Caroline Jones at Caroline.Jones@mortgagelaw.com

Lauren Polunsky Dreszer at Lauren.Polunsky@mortgagelaw.com

Peter Idziak at Peter.Idziak@mortgagelaw.com

Claire Barber at Claire.Barber@mortgagelaw.com

Andrew Duane at Andrew.Duane@mortgagelaw.com

Tye McWhorter at Tye.McWhorter@mortgagelaw.com

Cody Beitel at Cody.Beitel@mortgagelaw.com

Doug Foster¹ at Doug.Foster@mortgagelaw.com

¹Doug Foster is a non-lawyer and is not admitted to practice law in any state.