How Tragedy Is Transforming Condo Project Reviews
H By LISA
GELOSO, Head of Product Development & Customer Success, CondoTek
enry Ford once said, “the only mistake is the one from which we learn nothing.” To be sure, there are tons of mistakes that happen in the housing industry that are worth learning from, but few lessons have been as painful as the ones following the tragedy that took place in Surfside, Fla. last year. The collapse of the Champlain Towers and the loss of 98 lives has forever changed the condominium market. There have been few larger examples of this fact than Fannie Mae and Freddie Mac’s new guidance for financing condo and co-op properties, which will have a huge impact on the mortgage industry. In particular, the new guidelines will significantly alter condo project reviews, which are going to be infinitely more complex and labor-intensive than before. Fortunately, there are things lenders can do to prepare.
FOLLOWING UP ON FANNIE MAE AND FREDDIE MAC GUIDANCE The new GSE guidance offers a lot for lenders to chew on, starting with determining which condo projects are even available for financing. For example, before lenders can do anything on a Fannie Mae loan, they
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Lisa Geloso, is head of product development & customer success at CondoTek
need to check Fannie Mae’s Condo Project Manager to see if the property the borrower wants to buy is actually available for financing. If it’s on Fannie’s new “unavailable” list, the answer is no. Fannie Mae also requires a questionnaire that lenders need to fill out that creates multiple challenges for lenders, appraisers, and homeowner associations (HOAs), since some require responses that could open up liability issues for HOAs that
they aren’t prepared to deal with. In addition, the GSE is requiring all condo and co-op projects, whether they are new or existing, to have a 10% line-item reserve in their operating budget, which many do not. The guidance from Freddie Mac largely follows Fannie Mae’s. However, Freddie Mac is not changing reserve requirements for any project review types. According to its bulletin of Dec. 15, 2021, Freddie Mac will allow sellers to continue to rely on a working capital fund for new condominium projects or a reserve study for both established and new condominium projects when the project’s budget provides less than 10% replacement reserves. Under the guidance from both GSEs, however, the largest impact on lenders will be the amount of time, effort, and resources they’ll need to devote on project reviews, which will include much more documentation about condo or co-op developments than ever. In fact, it’s this change that’s likely to cause lenders the most trouble. Prior to new GSE guidance, depending on the review type, the recommended documents needed to review a project were the typical documents, such as the projects legal documents, financials, appraisal, and questionnaires.
