Considering that horrific condo building collapse in Florida last year, Fannie Mae and Freddie Mac have issued new guidance to lenders. Today we’ll explain the implications of that new directive.
In most mortgage transactions, after you close on your loan with your lender, that lender will “package” your paperwork and “sell” your loan to Fannie Mae or Freddie Mac. They sell your loan to not only earn a commission – the true source of income in lending, but they also get their capital back to lend again. For Fannie and Freddie to buy your loan, the lender must make certain representations that all the aspects of the loan file meet the established lending guidelines and provide a warranty that the lender did their job of insuring compliance. In the industry, we call this the lender’s “reps and warrants”.
If the collateral of your mortgage loan involves a condo, the lender must make certain your project meets all the guidelines. They do this in part by reviewing disclosure forms provided by the property management company hired by the condo association. The Condominium Disclosure for Lenders, also known as the RR-105-C form here in Hawaii contains various pieces of information about the project. Generally, the parts of the form lenders review are the owner-occupancy figures, delinquency rate for monthly association payments, and if there is any litigation. They also look for any mention of resort or short-term vacation activity.
Now both Fannie Mae and Freddie Mac want more information, specifically information about the structural soundness of the project. Here’s some of the questions the Property Management company will now need to answer – and if they don’t, the project won’t meet the requirements for lending:
When was the last building inspection by a licensed architect, licensed engineer, or any other building inspector?
Did that inspection yield any issues?
Is the HOA aware of any deficiencies related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?
Are there any outstanding violations of zoning ordinances, or codes, etc. related to the safety, soundness, structural integrity, or habitability of the project’s building(s)?
Is it anticipated the project will, in the future, have such violation(s)?
Does the project have a funding plan for its deferred maintenance components?
Has the project completed a reserve study within the past 3 years?
What is the total of the current reserve account balance(s)?
Are there any special assessments unit owners must pay?
Are there any planned special assessments owners will be obligated to pay?
While these seem like normal legitimate questions to ask, these questions are requiring the Property Management companies to make assurances on behalf of the associations they are hired by. The property management companies were already reluctant to complete the prior disclosures because they felt they were opening themselves up to liability. Now the additional questions regarding structural soundness, funding, and future needs, are asking the property management companies to make definitive statements they won’t want to make. In their defense, their role is to assist a volunteer group of owners self-managing their project. Making representations of what that Board of Directors knows is opening themselves up to liability.
What happens if a property management company refuses to complete the new required forms? Well, it has already happened a lot in just a short period of time. Borrowers and their lenders who thought there weren’t any issues with the financing just got a rude awakening. The project will be classified as “non-warrantable” and conventional Fannie/Freddie financing will not be available.
The good news is that Hawaii already has a multitude of non-warrantable condo projects, and financing is available. The type of financing available for these projects comes from lenders that lend from their own portfolio of funds and don’t sell the loans to Fannie and Freddie. The rates are competitive, but the ability for low down payment options won’t be available.
If you are planning on purchasing or refinancing a condominium, it is even more important than ever to do your research and ask questions of the potential lender. You need to determine their understanding of condo issues in Hawaii. You also need to make sure they have the ability to provide both conventional Fannie/Freddie financing and Portfolio loans products.