The collapse of the Champlain towers in Florida brings new demands

The collapse of Champlain Towers South in Surfside, Florida in June 2021 sent shockwaves across the United States and alerted condominiums to the dangers of aging infrastructure. In light of this tragic event, secondary mortgage market giants Fannie Mae and Freddie Mac have issued bulletins advising of new “temporary” requirements for mortgages issued through condominiums and cooperatives.

Simply put, Fannie Mae and Freddie Mac (officially known as the Federal Home Loan Mortgage Company) are quasi-governmental entities that were created by Congress to create a secondary market for residential mortgages. None of the entities issue or service their own mortgages, but instead purchase mortgages from the originating banks to hold the mortgages or sell them as mortgage-backed securities. It works to provide liquidity to the residential mortgage market and acts as collateral for banks and original lenders.

Prior to the Surfside collapse, the condominiums and co-ops that were in dispute were considered “ineligible projects” for the purposes of Fannie Mae and Freddie Mac eligibility. In practice, this meant that a unit owner looking to refinance or a potential buyer looking to get a mortgage on a unit would not be able to approach traditional banks or lenders looking to sell the mortgages on the secondary market, forcing them to opt for cash transactions or to find a local lender to hold and service the mortgage.

Following the Surfside collapse, Fannie Mae and Freddie Mac issued bulletins regarding “temporary” additional requirements for mortgages obtained for condominiums and co-op residential units. These additional new requirements could make it more difficult for unit owners to refinance or for new buyers to obtain mortgages. Below is a summary of the main temporary requirements that will be implemented in 2022:

Fannie Mae, Letter to the Lender (LL-2021-14)

On October 13, 2021, Fannie Mae released Letter from the Lender (LL-2021-14) regarding “Temporary Requirements for Condo and Co-op Projects.” In accordance with LL-2021-14, “[l]unit-backed loans 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.” The lender’s letter goes on to explain that “significant deferred maintenance” means projects that meet one of the following criteria:

  • “a total or partial evacuation of the building to complete the repairs is required for more than seven days or an indefinite period; ” and or

  • “the project has deficiencies, defects, significant damage or deferred maintenance that

    • is serious enough to affect the safety, soundness, structural integrity or habitability of the upgrades;

    • upgrades require substantial repairs and rehabilitation, including many major components; Where

    • interferes with the safe and sound operation of one or more major structural or mechanical elements of the building, including, but not limited to, the foundation, roof, load-bearing structures, electrical system, HVAC, or plumbing. »

Additionally, projects that have not obtained a certificate of occupancy or have not passed regulatory inspection or recertification, such as those performed by the New Jersey Department of Community Affairs, will also be deemed ineligible.

Fannie Mae’s “temporary” requirements apply to all condominiums and co-ops of five or more units and went into effect for “whole loans purchased on or after January 1, 2022.“The new requirements will remain in place ‘until further notice’.

You can read the full letter from the lender here.

Freddie Mac Newsletter 2021-38

On December 15, 2021, Freddie Mac issued Bulletin 2021-38, which, like Fannie Mae Lender’s letter (LL-2021-14), also imposes additional temporary requirements on residential mortgages sought for condominiums and co-ops. five or more attached units. These temporary project review requirements apply to projects “in need of critical repairs” and projects undergoing special assessments.

Bulletin 2021-38 defines “critical repairs” as follows:

Repairs and replacements which significantly impact the safety, soundness, structural integrity or habitability of the project building(s) and/or which impact the unit values, financial viability or marketability of the project. These repairs and replacements include:

    • All risks to the safety of people;

    • Violations of any federal, state, or local law, ordinance, or code relating to zoning, subdivision and use, construction, housing accessibility, health matters, or fire safety;

    • Material defects;

    • Significant deferred maintenance

Any wanted mortgages in a condominium or co-op that are deemed to be in need of “critical repairs” will not be eligible for sale at Freddie Mac, meaning these mortgages cannot be sold on the secondary market. To determine if a given community needs critical repairs, you can:

  • Board meeting minutes,

  • engineering reports,

  • reserve studies,

  • list of necessary repairs provided by the homeowners association, cooperative society or management company, or

  • other similar documents.

Once it is determined that a community needs critical repairs, it will remain ineligible for temporary requirements until the repairs are completed and documented. Beyond critical repairs, communities will also be deemed ineligible if there are special assessments, even if paid in full, that are determined to have been assessed due to or as a result of a critical repair, as defined in Bulletin 2021-38.

Freddie Mac’s “temporary” project requirements will come into effect on February 28, 2022. For the moment, no end date has been announced.

You can read the full Bulletin 2021-38 here.

Form 476A

As a result of Fannie Mae and Freddie Mac temporary requirements, communities will be required to complete Form 476A, which is an addendum to the Form 476 Condominium Project Questionnaire, to help determine if a given project/community meets the new temporary requirements. requirements subject to Fannie Mae, Lender Letter (LL-2021-14) and Freddie Mac Bulletin 2021-38.

What does this mean for your condo or co-op?

Ultimately, what does this mean for your condo or co-op? In short, if your community is determined to have significant deferred maintenance and/or need critical repairs, unit owners and potential buyers will be unable to obtain mortgages from banks and traditional lenders seeking to sell these mortgages on the secondary. Marlet.

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