Following the collapse of a high-rise condo building in Surfside, Fla., Fannie Mae and Freddie Mac said last year that they would not purchase loans for condo and co-op units in buildings with “significant deferred maintenance” or that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions. 

What does that mean for New York City co-op and condo boards and building managers? The new rules are significant because:

• Higher lending limits have increased the number of units eligible for government-backed loans and, thus, the number of New York City buildings that will be required to provide information.
• Significant deferred maintenance could land a condo or co-op association on a “no loan” list maintained by Fannie Mae and Freddie Mac and accessible to lenders (even those not making government-backed loans).
• Not only do the rules govern deferred maintenance, but they set guidelines for reserve funds and special assessments as well.

Higher Lending Limits, More Units Affected

Prior to the pandemic, the changes might have had a more limited impact on condo and co-op boards in New York City. But federal lending limits in high-cost areas like New York have increased by 50 percent since 2019, substantially boosting the number of potential units and buyers eligible for conforming loans. (The loans are “conforming” because they satisfy the terms and conditions set forth by Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency.)

In 2023, the lending limit for New York City has been set at $1,089,300—the first time the limit has exceeded $1 million. When factoring in a 10 percent down payment, buyers would have the ability to purchase a condo or co-op for just over $1.2 million. While not enough for a co-op in an exclusive Park Avenue building or a condo in one of the buildings on Billionaire’s Row, a review of current real estate listings shows 40 percent of condos and co-ops available in Manhattan and 80 percent of those in Brooklyn are priced at $1.2 million or less. 

As Brick Underground reported in a recent article, a higher conforming loan limit “will allow more borrowers access to conventional, fixed rate-financing, instead of adjustable-rate financing.” The new $1 million threshold could boost the New York condo and co-op sales market as well, the article said. The article quoted a mortgage lender who said the increase is “a psychologically important event, and not just for those who are in that market, but for all those who have been watching prices soar over the past two years. For years the FHFA loan limit was stuck at $417,000, so this is a huge difference for those of us who remember those days.”

The ‘Unavailable’ List

What happens if a building has significant deferred maintenance or if a condo or co-op board or building management declines to provide information or fill out the required paperwork? 

In response, Fannie Mae and Freddie Mac may add a building to its “unavailable” list—in other words, those buildings that have deemed ineligible for loans backed by the two institutions. The list is held in the Condo Manager database, which lenders and mortgage brokers across the nation can use to determine whether a building is eligible for government-backed loans and why previous loans in a building have been declined. 

Not only would inclusion on the list put a condo or co-op out of reach for a buyer with a conforming loan, it also could send a negative message about the soundness of the building to lenders making non-conforming loans. In fact, in the wake of the new requirements, a number of mortgage brokers and lenders making jumbo or non-conforming loans are now asking borrowers to provide the same information about deferred maintenance as Fannie Mae and Freddie Mac.

Defining ‘Significant Deferred Maintenance’

Fannie Mae and Freddie Mac classify buildings as having significant deferred maintenance if they: 

• have deficiencies, defects, substantial damage, or deferred maintenance that is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements.

• have had a full or partial evacuation of the building for more than seven days or an unknown period of time to complete repairs.

• need substantial repairs and rehabilitation, including many major components.
  
• have one or more major structural or mechanical elements whose safe and sound functioning is impeded. This includes, but is not limited to, the foundation, roof, load-bearing structures, electrical system, HVAC, or plumbing. 

Additionally, units in buildings that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are not eligible for Freddie Mac or Fannie Mae backing. 

Buildings remain ineligible until required repairs have been made and documented. Acceptable documentation may include a satisfactory engineering or inspection report, certificate of occupancy, or other substantially similar documentation that shows the repairs have been completed in a manner that resolves the building’s safety, soundness, structural integrity, or habitability concerns.

Special Assessments And Reserves

The guidelines also include stricter eligibility review requirements for any condo or co-op that has issued or is planning to issue a special assessment to address deferred maintenance items.

Any current or planned special assessment, even if paid in full for a unit, must be reviewed to determine acceptability. The lender must document the loan file with 1) the reason for the special assessment; 2) the total amount assessed and repayment terms; 3) documentation to support no negative impact on the financial stability, viability, condition, and marketability of the building; and 4) 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. If the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed or the building is not eligible. Additionally, If the lender or appraiser is unable to determine that there is no adverse impact, the building is ineligible.

Why are Fannie and Freddie targeting special assessments? Brick Underground noted that Fannie Mae is concerned that buyers are able to pay not just when they purchase a condo or co-op, but throughout the life of a mortgage. Future assessments are unknown and could push financially strapped owners into default. 

The new rule also alters requirements for reserves. Condo and co-op boards are expected to maintain a 10 percent operating budget reserve. However, lenders under the previous Fannie and Freddie guidelines were able to obtain a reserve study in lieu of the 10 percent requirement. The new rules end this practice—although co-ops and condo boards are encouraged to commission an updated reserve study and follow its recommendations.

Additional Documentation Required

To comply with the rules, co-ops and condominium management are being asked by lenders to complete a lengthy addendum to the standard Fannie Mae questionnaire. If they fail to do so, purchasers may not be able to finance mortgages and current residents may be unable to refinance their loans. 

Condo and co-op boards and building managers are also receiving more requests for other documents. Fannie Mae has recommended that lenders review the past six months of a building’s HOA meeting minutes, as well as any available inspection, engineering, or other certification reports completed within the past five years to identify deferred maintenance that may need to be addressed.

Given the complexity of the guidelines and their potential impact on a building’s long-term financial health, condo and co-op boards would be well advised to consult with counsel about strategies to meet the requirements. To learn more about how Guzov LLC’s condo and co-op board lawyers can help, contact us for a consultation, or visit our Condominium & Cooperative Law Firm practice area page for more information.