Stricter Fannie Mae Lending Standards Could Impact Condo Values

The Federal National Mortgage Association (“Fannie Mae” or “FNMA”)amended its lending standards, effective January 1, 2022, in a manner that could have a serious impact on the availability of financing and the value of homes in attached condominium associations. (See Fannie Mae Lender Letter (Letter LL-2021-14), dated October 13, 2021.)

By Frederick T. Whitney, Esq. & Bill Curry, Esq.

WHAT IS “FANNIE MAE”?

Fannie Mae is a government sponsored entity created for the purpose of providing access to affordable mortgage loans. Fannie Mae purchases loans from banks and lenders and packages them for sale as mortgage-backed securities. Fannie Mae uses the funds from the sale of securities to purchase more loans. This cycle enables FNMA to provide liquidity to the U.S. mortgage market.

To be eligible for purchase by Fannie Mae, a loan must meet certain lending qualifications. Because Fannie Mae purchases so many loans its lending standards have a significant influence on the amount and types of financing available. Fannie Mae’s lending terms are often referred to as “conventional loans”.

SO, WHAT CHANGED?

On June 24, 2021, Champlain Towers South, a twelve-story condominium project in Florida, collapsed killing 98 people. In response, Fannie Mae issued “temporary” requirements intended to make ineligible, the purchase of loans by FNMA in attached condo projects with “significant deferred maintenance.”

Fannie Mae requires that lenders looking to sell it a loan in a condominium association provide a questionnaire completed by an authorized representative of the HOA that provides appropriate assurances relating to deferred maintenance, inspections and intended special assessments. (Fannie Mae Form 1076 Condominium Project Questionnaire, dated March 2016 (addendum added December 2021).) The new requirements start at page six of the questionnaire and make specific inquiries to address:

1. Whether there have been any inspections of a project building that identified safety issues;

2. Whether the HOA is aware of any deficiencies (or deferred maintenance) related to safety, soundness, structural integrity, or habitability of the project’s buildings;

3. Whether the HOA is aware of any code violations or orders to evacuate a project building; and/or

4. Whether the HOA intends to levy any special assessments to address deferred maintenance.

While the Fannie Mae form presents specific language and questions, it is commonplace for a lender to design its own form using different language and presenting the questions in a different order.

Associations are accustomed to responding to Fannie Mae lender questionnaires, and have been routinely doing so for decades. Historically, the information sought in the questionnaire involved objectively verifiable information that could be produced for a nominal fee paid by a party of the transaction.

The new Fannie Mae questions, however, go well beyond the traditional objectively verifiable information, requiring the board’s involvement to characterize the integrity of the project buildings and to confirm the board’s future intentions relating to possible special assessments.

WHAT DOES AN ASSOCIATION HAVE TO DO?

In short, nothing. California law makes clear that an association does not have a duty to make any disclosure to a prospective purchaser. (Kovich vs. Paseo Del Mar Homeowners Association (1996) 41 Cal.App.4th 863.) More specifically, in Kovich, the appellate court, while recognizing that a seller has an obligation to disclose construction defects to a seller, refused to impose such a duty on the association. Thus, an association does not have to do anything.

While an association has no duty to a prospective purchaser, however, the refusal to respond to a lender questionnaire will likely mean that the borrower will be denied conventional financing because Fannie Mae will not be willing to purchase their loan. This could mean that a proposed sale falls through or that an attempted refinance will be denied.

WHY SHOULD AN ASSOCIATION CARE ABOUT CONVENTIONAL FINANCING?

Conventional financing accounts for most loans in condominium projects in California (as many as 70% of them). Conventional loan limits were recently raised to address increasing property values, and currently range from $647,200 to $970,800, based upon the county the home is located within. Conventional financing offers lower interest rates and opportunities for buyers to obtain financing with lower down payments.

Borrowers can obtain financing through other sources (i.e., through “non-conforming” loans), but they will typically be required to provide higher down payments (e.g., 20% or more), and to pay an interest rate at least a full percentage point higher than conventional rates. Higher down payments will likely eliminate some potential buyers (meaning few competing purchase offers) and would likely result in more purchases of units as rentals as non-conventional financing is more common with investment properties.

To illustrate the impact that the availability of conventional financing can have on home value, consider that a 1% increase in the interest rate of a loan results in a 13% higher payment to the purchaser. To get the same payment that conventional financing would offer, the purchaser of a condominium unit would have to pay 10% less than could be offered if conventional financing was available to obtain the same payment.

WHAT CAN AN ASSOCIATION BOARD DO?

An association can provide responses to Fannie Mae questionnaires to accommodate conventional financing. If it does so, any responses should be truthful. Moreover, it is recommended that the process followed by the board be documented to demonstrate that the board followed the business judgment rule in crafting its responses.

For efficiency’s sake, the response should be crafted in a manner that can be applied to all escrow requests, rather than requiring the board to meet and respond to each request individually.

A model process might involve a board sitting with its reserve study in executive session to identify for each project building component whether there is any deficiency or deferred maintenance that needs to be addressed.

The board should also consider whether any special assessment is needed. If the answer is that there is “no” deficiency or deferred maintenance in any project building, then the board should document its efforts and memorialize its authorization for an appropriate response in its minutes. The process should be repeated periodically (perhaps as each annual budget is prepared).

If a board determines that there is a deficiency or deferred maintenance in a project building, then conventional financing may not be available until the board addresses the deficiency (e.g., by completing repairs with available reserves, levying a special assessment to fund them or by obtaining a loan).

Frederick T. Whitney, Esq.

Frederick T. Whitney, Esq., of Whitney | Petchul, APC entered the community association industry in 1998 and has significant experience in community association elections and negotiation and drafting of contracts, dispute resolution, CC&R enforcement and interpretation.

William (Bill) Curry, Esq.

William (Bill) Curry, Esq., of Whitney | Petchul, APC specializes in association legal counsel and has been in the industry for four years.