Fannie Mae Lender Letter LL-2021-14Lenders across the nation have begun to digest the newest lending guidelines issued by Fannie Mae in Lender Letter 2021-14 released on October 14th, 2021. The new guidelines outline Fannie Mae’s new risk tolerance for purchasing condominium and cooperative loans on both new construction and established properties. The focus of these new directives is on ensuring that condominium properties have appropriate capital funding for reserves, and more importantly, to create a vetting process to ensure that properties with deferred maintenance to structural and mechanical components can be properly reviewed before mortgage financing is offered to borrowers.Lenders are now tasked with making determinations about project eligibility by reviewing additional documentation which includes additional commentary required on the property appraisal, detailed information about special assessments and review of any violations issued by regulatory agencies. At CondoTek we are committed to providing our clients with accurate documentation and data to make these important eligibility decisions and also providing additional warrant and project review services to ensure that only eligible properties are financed. Below is a key summary of the new review and warrant guidelines with specific directives and lender requirements. Also please note, CondoTek can provide unique solutions for condominium and cooperative compliance. With the recent acquisition of National Condo Advisors, the CondoTek team now adds an expert lending compliance division to the current team of document auditors. The addition of the NCA team, along with the technology solutions CondoTek currently provides, has led to the release of our newest product, the Condo Project Warrant (CPW). CondoTek now ensures the warrantability of condo and co-op projects nationwide through the CPW service. The release of these new Fannie Mae condo and co-op lending guidelines requires end to end, origination to closing, solutions for lenders providing condominium and cooperative lending. Our new CPW product provides our clients with document collection, document review and guaranteed compliance warrant in less than 10 days. Guidelines as follows:Condo Project Manager (CPM) “Unavailable” Status: Effective ImmediatelyFannie Mae’s CPM “Unavailable” status is the first place to start when determining condo/co-op eligibility. This new status will appear in the CPM system when Fannie Mae has determined that a specific property is unwarrantable due to not meeting the temporary eligibility requirements or standard eligibility requirements within the Selling Guide. Fannie Mae requires that a lender check CPM to ensure that a condo or co-op project is eligible for lending. New Construction Condo Reserve Study Acceptance SuspenseFannie Mae is immediately suspending the process of allowing a new construction condo property to utilize a Reserve Study to determine appropriate reserve funding in lieu of utilizing the 10% reserve requirement. Although many portfolio lenders and investors continue to require reserve studies to determine lending eligibility for new condo properties, Fannie Mae will no longer accept the prescription for reserve offered within them. Established Condo and Co-op Reserve Study Acceptance SuspenseLenders can no longer accept a Reserve Study in lieu of a 10% budgeted reserve requirement. If an established condo or co-op property has less than 10% budgeted for reserves in their operating budget, then the property is ineligible for sale to Fannie Mae. An established project that is utilizing a reserve study with a reserve contribution that is less than 10% of the operating budget can be submitted for review and approval through the PERS process. Significant Deferred Maintenance and Unsafe ConditionsThe crux of Fannie Mae’s temporary guidance is to ensure that condominium and cooperative properties are habitable and free of dangerous and unsafe conditions. Outlined in the excerpt below, significant deferred maintenance will render a project ineligible until it can be determined that a property is brought to the outlined standards. For lenders, determining this eligibility criteria may require a violation search and a detailed review of special assessments to determine compliance. 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. These projects will remain ineligible until the required repairs have been made and documented.These policies do not apply to routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property. Special AssessmentsAlthough the guidance does not render projects with special assessments ineligible, it does outline the need to obtain the necessary financial documentation to confirm that an association has the capital and wherewithal to fund any needed repairs. Special assessments related to safety, soundness, structural integrity and habitability must be reviewed to determine if related repairs are completed or the project is ineligible. Appraiser Requirements for Special AssessmentsLenders can require appraisers to determine that there is no adverse impact of the special assessment to safety, soundness, structural integrity and habitability of the project. PEW Waiver SuspensionProject Eligibility Waivers are no longer an acceptable vehicle for lenders to determine eligibility and will not be issued for significant deferred maintenance, Certificate of occupancy, regulatory inspections, projects with large special assessments and insurance policy deficiencies. Best Practices The best practices section of these new temporary guidelines outlines several additional steps that may be appropriate for lenders to take to determine eligibility.
As a best practice, the lender should review the past six months of a project’s HOA meeting minutes and obtain information about any maintenance or construction that may have significant safety, soundness, structural integrity, or habitability impacts on the unit or the project. References to items such as improvements, renovations, inadequate reserve funding, budget deficits, and negative cash-flows should be researched to determine if these items are related to deferred maintenance or other conditions that impact the safety, soundness, structural integrity or habitability. We recommend that lenders review any available inspection, engineering, or other certification reports completed within the past five years to identify deferred maintenance that may need to be addressed. As a reminder, projects engaged in construction defect or other material litigation are ineligible. We are reminding lenders that their appraisers must document any special assessments or deferred maintenance that may impact the safety, soundness, structural integrity, or habitability of the unit or the overall project and its amenities.