In response to the tragic collapse of the Champlain South Tower in Surfside, Florida, many lenders began considering new ways to assess and manage risk in buildings with potentially unsafe conditions. In October, Fannie Mae issued Lender Letter LL-2021-14 outlining additional requirements that went into effect on January 1, 2022 impacting the eligibility of condo and co-op projects with five or more attached units. According to Fannie Mae, the purpose of the additional requirements is “to protect borrowers from physically unsafe or financially unstable projects” and to manage risk for Fannie Mae, its lenders and investors.

The short and long-term impact the new guidelines will have on condominiums and co-ops including unit sales, market value and budgeting is presently unknown and will be analyzed as completion of the deferred maintenance addendums continues.

Under the new guidelines, loans secured by units in condo and co-op projects with “significant deferred maintenance” or that have known unsafe conditions requiring repair are not eligible for purchase and will remain ineligible until the repairs have been made and documented. In short, Fannie Mae will not guarantee mortgages on units in condominiums with significant deferred maintenance and/or known unsafe conditions, which could significantly impact condominium owners’ ability to sell their units.

As of January 1, 2022, lenders are required to review whether a loan will be secured by a unit in a project with significant deferred maintenance or that has received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions. Fannie Mae defines “significant deferred maintenance” as deficiencies that meet one or more of the following criteria:

• Full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time;

• The project has deficiencies, defects, substantial damage, or deferred maintenance that

◦ is severe enough to affect safety, soundness, structural integrity, or habitability of the improvements;

◦ the improvements need substantial repairs and rehabilitation, including many major components; or;

◦ impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.

Additionally, projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are also ineligible.

Additionally, projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are also ineligible.

Under the new requirements, lenders are also now required to review any current or scheduled special assessment, even if the assessment is paid in full for the subject unit. Lenders must determine and record: (i) the reason for the special assessment; (ii) the total amount assessed and repayment terms; (iii) documentation to support no negative impact to the financial stability, viability, condition and marketability of the project; and (iv) borrower qualification with any outstanding special assessment payment.

Fannie Mae further expects lenders to obtain relevant financial documents to determine whether the association has the ability to fund repairs. And, if the purpose of the special assessments is to make repairs related to safety, soundness, structural integrity or habitability, all related repairs must be completed or the project is not eligible. Of particular importance is that a project is ineligible if a lender is unable to determine whether significant deferred maintenance or unsafe conditions exist.

The new guidelines also temporarily suspend Fannie Mae’s practice of allowing lenders to obtain a reserve study instead of meeting Fannie Mae’s 10% budget reserve requirement.

Finally, LL-2021-14 offers “best practices and reminders” to lenders including, among other things, to review the previous six months of an association’s meeting minutes, obtain information about maintenance, review available inspection, engineering or other certification reports and research whether inadequate reserve funding, budget deficits and negative cash-flow is related to deferred maintenance or other unsafe conditions.

Deferred Maintenance Addendum to Mortgage Questionnaires
In response to LL-2021-14, lenders immediately began circulating deferred maintenance addendums with questions addressing the new requirements. Initially, responses were optional, but as of January 1, 2022, all lender questionnaires now likely include deferred maintenance addendums that are required to be completed and include questions such as:

Are there any conditions, project wide, regarding deferred maintenance (within the past 5 years) which may negatively impact the safety, structural soundness, habitability, or functional use of any individual unit or the project as a whole?

If yes, describe and provide supporting documentation, such as architect and/or engineer reports, certificate of occupancy, insurance inspections, notices of pending or active building code violations, fines or liens from local building authority, or special assessments levied for repairs related to these issues.

The obligation to respond, and how to respond, is raising questions and concerns for associations.

Responding to the New Questionnaires
There is no one size fits all response to the questions posed in deferred maintenance addendums being used by lenders. Associations and/or their agents should carefully read the questions and determine what information is being requested and whether it triggers disclosure of a deferred maintenance condition, past or present, under the definition provided by Fannie Mae. Although the association may be inclined to decline responding to the deferred maintenance addendum, especially if the anticipated response is in the affirmative, keep in mind that a project is ineligible under the new guidelines if a lender is unable to determine whether significant deferred maintenance or unsafe conditions exist. Similarly, associations should avoid the temptation to respond with a simple “no” on the assumption that no issues exist.

Before providing any response, associations would be wise to consult with an experienced condominium attorney who can offer advice on the appropriate scope and extent of the response based on the specific circumstances of the association including whether a condition meets Fannie’s Mae’s definition of “significant deferred maintenance.”

Perform Necessary Repairs?
Although Fannie Mae has labeled the new requirements as “temporary” it is not clear how long they will be in place. If known “significant deferred maintenance” issues exist at the condominium, associations should consider engaging a qualified professional to assess the condition of the building(s) and the scope and cost of the repair(s). The sooner the condominium receives a clean bill of health, the better.

Increase Reserve Contributions?
While owners are generally averse to increases in common charges, it will be inevitable under the new guidelines. Associations should carefully review their current reserve contributions and consider increasing the amount if they will fall below the requisite 10% threshold. At least 10% of the association’s annual income should be budgeted toward a reserve account for future maintenance and repairs.

Liability to Associations?
Responding to lender questionnaires and releasing information to third parties has long raised liability concerns for associations and responding to a deferred maintenance addendum is no different. Before responding to a lender questionnaire, including a deferred maintenance addendum, associations should receive a written liability release from the owner/seller of the condominium unit and the potential buyer.

The short and long-term impact the new guidelines will have on condominiums and co-ops including unit sales, market value and budgeting is presently unknown and will be analyzed as completion of the deferred maintenance addendums continues.