Government backed mortgage lenders, Fannie Mae and Freddie Mac, issued temporary project review requirements relating to significant deferred maintenance in condominiums, co-ops, and similar developments.  To assess a project’s eligibility, Fannie Mae and Freddie Mac each promulgated a standardized “Condo Project Questionnaire Form” to obtain information related to significant deferred maintenance, the plan for addressing same, and the corresponding financial burden on condos and unit owners.

In July 2023, at the direction of the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac updated and relaxed their requirements for lenders to issue loans to prospective buyers of condo units. The new guidance is provided by Fannie Mae Selling Guide Announcement (SEL-2023-06) and Freddie Mac Selling Guide Bulletin 2023-15. These were at the direction of the FHFA to move towards permanent guidelines for lenders servicing condo units. They went into effect onSeptember 18, 2023, for all new loan applications, but lenders were authorized to incorporate changes from the date the guidance was issued a few months ago.

The new requirements apply to all condo loans and all loans in a co-op project with five or more attached units, as well as loans under the waiver of project review policy.   While there may be fewer ineligible projects under the new guidelines, many lenders are likely to remain wary of older condo projects or those that may be unable to finance necessary upgrades in the future.

The Fannie Mae/Freddie Mac project review requirements do some of the following:

• define critical repairs, material deficiencies, and significant deferred maintenance, including defining routine repairs that are not considered critical;
• prohibit sale of condo loans and co-op share loans in projects in need of critical repairs;
• prohibit sale of condo loans and co-op share loans in projects with current evacuation orders due to unsafe conditions;
• require a review of all structural or mechanical inspection reports that have been completed within 3 years of the project review date;
• provide new requirements for condo or co-op projects with pending or approved special assessments; and
• prohibit sale of condo loans and co-op share loans in projects with unfunded repairs totaling more than $10,000 per unit.

Critical Repairs

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 include:

• Material deficiencies which, if left uncorrected, have the potential to result in or contribute to critical element or system failure within one year;
• Any mold, water intrusions or potentially damaging leaks to the project’s building(s) that have not been repaired;
• Advanced physical deterioration;
• Any project that failed to pass state, county, or other jurisdictional mandatory inspections and/or certifications specific to structural soundness, safety and habitability; or
• Any unfunded repairs costing more than $10,000 per unit that should be undertaken within the next 12 months (does not include repairs made by the unit owner or repairs funded through a special assessment).

Routine Repairs

These repairs are not considered to be critical and include work that is:

• Preventative in nature or part of normal capital replacements (e.g., focused on keeping the project fully functioning and serviceable); and
• Accomplished within the project’s normal operating budget or through special assessments that are within guidelines.

Material Deficiencies

Physical deficiency that affects a property’s safety, soundness and structural integrity.

Significant Deferred Maintenance

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

What do the Bulletins Mean for Condo and Coop Boards?

While the new bulletins only directly impact lenders, condos and coops need to be cognizant of these changes and their likely impact.

Two changes boards should pay particular attention to are:

• Lenders are now required to review all structural and mechanical inspection reports, including reserve studies, completed in the prior three years from the loan project review.
• Lenders are now prohibited from issuing loans for complexes with unfunded repairs totaling $10,000 or more per unit.

Additionally, it is likely that lenders will continue requesting an expanded range of documents related to the condo or coop when assessing eligibility.  This may include board meeting minutes, board meeting notices, and other documents related to a condo’s plans for financing and completing future repairs. 

The guidelines continue Fannie Mae’s and Freddie Mac’s efforts to address what they have determined to be risky investments. Condo and coop boards should expect Fannie Mae and Freddie Mac guidelines to continue to evolve.