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Taking advantage of the current seller’s market and/or low interest rates, Unit Owners in your Condominium or Cooperative Association may wish to sell or refinance their units.  Seems simple, right?  Maybe not, as whether a prospective buyer or current owner can obtain financing or refinancing may depend upon your Association Board’s response to questions regarding the condition of the building.

Those questions are being posed as the result of new guidelines from the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

As a result of these recently imposed guidelines, Fannie Mae and Freddie Mac are potentially putting Community Association Boards and their managers in a bind.

In this article, we explain the changes in guidelines, how they affect Condominium and Cooperative owners and their Boards, and how they may ultimately impact the value of Condominium and Cooperative units.

New Guidelines May Restrict the Mortgage Market

Fannie Mae and Freddie Mac acquire approximately 70% of all Condominium mortgages in the United States.  This acquisition creates a secondary market for lenders who originate mortgages, which makes homeownership affordable for millions of Americans.  

Recently, however, both Fannie Mae and Freddie Mac have implemented new guidelines that exclude from eligibility for acquisition any loans for units in Condominium and Cooperative Communities that are considered to be in need of “critical repairs”.  Critical repairs are defined by these agencies as repairs that significantly impact the safety, soundness, structural integrity or habitability of a community, and/or repairs that impact unit values, financial viability or marketability of a community.

In order to determine if a Condominium or Cooperative Community meets the newly imposed guidelines such that a mortgage is eligible to be acquired by Fannie Mae or Freddie Mac, Associations are being asked to complete an addendum to the existing Condominium Project Questionnaire typically required by Fannie Mae and Freddie Mac.  

If an Association’s Board cannot respond to the questionnaire by confirming that the building in which the affected unit is located is not in need of critical repair and does not exhibit significant deferred maintenance, the loan will not be eligible for acquisition by Fannie Mae or Freddie Mac.  If that is the case, potential owners seeking to purchase and current owners seeking to refinance will be unable to obtain mortgages from conventional banks and lenders who seek to sell those mortgages on the secondary market.   Simply stated, mortgage originators backing a potential purchaser or refinancing owner will decline to close a loan if they know they cannot sell that mortgage on the secondary market.

It is easy to see how the inability to secure mortgages on Condominium and Cooperative units can very quickly drive down property values in those buildings.  If Condominium or Cooperative Owners and potential buyers are unable to secure mortgages on units, they will be forced to either accept only cash deals or to pursue private mortgages.  In short, the inability to obtain traditional mortgages is likely to result in fewer eligible purchasers and plummeting unit values.  

What Condominium and Cooperative Boards Need to Know.

An Association is legally obligated to provide information in connection with the sale or transfer of a unit only as set forth by statute.  While an Association is permitted to provide information beyond that which is required by law, doing so may potentially expose the Association to liability.  With respect to the nature and subject matter of some of the questions posed within Fannie Mae’s and Freddie Mac’s recently required Addendum, Board Members may not even have the requisite knowledge to provide an accurate response.  Whether a Board should provide a response is a very serious matter, and all Boards are strongly encouraged to seek advice and guidance from the Association’s legal counsel prior to providing any information outside of that required by law to be provided in connection with the sale, transfer or refinancing of a unit.

How Katzman Chandler Can Help

In light of these new guidelines, it is best for Condominium and Cooperative Association Boards to seek experienced legal counsel regarding best practices for addressing these situations.  In addition to assisting your Community Association in handling these new guidelines, Katzman Chandler, through its newest program, CondoHOALoans, can assist your Association in identifying and securing conventional or private loans to complete necessary repair or maintenance projects, fund budget shortfalls or jumpstart reserves. Our CondoHOALoans program also provides 100% free delinquent account collection during the life of your Association’s conventional or private loan.

Now is the time to download our FREE and informative Community Association Funding Infographic, take our FREE Community Association Financial Health Survey, and schedule your FREE virtual consultation with a Partner of Katzman Chandler.

We have the information and experience to answer your questions, walk you through your options, and identify a funding option that best suits your Community’s unique financial needs.

Contact us today, and let us assist you in making “critical repairs” a term that never applies to your Condominium or Cooperative.