Fannie Mae’s new condo loan rules require lots of documentation, but what if an HOA doesn’t have it? And who pays the higher fee for reams of paperwork?
CHICAGO – Fannie Mae’s sweeping new national condominium and co-op apartment lending regulations were created to protect residents, but the tough rules do not cover all the problems, appraisal experts say.
High-rises with “aging infrastructure and significant deferred maintenance is a growing concern across the nation,” noted the Fannie Mae memorandum, issued as a result of the tragic collapse of the Champlain South Tower in Surfside, Florida, which killed 98 people. The new regulations went into effect on Jan. 1.
How do lenders and appraisers address deferred-maintenance issues if they do not have access to the documents which now are sold by management companies?
“The elephant in the room is, who is going to absorb the cost of providing the hefty list of documents that reveal the current condition of the property?” asks veteran Realtor Sara E. Benson, president of Chicago-based Benson Stanley Realty.
The new rules will also apply to poorly constructed newer buildings that evidence shoddy workmanship or construction deficiencies, or substandard materials.
Analysts say the tougher restrictions could have a major impact on the sales and purchase of condos and co-ops in Chicago. Many lakefront high-rises date back to the 1950s and 1960s, and some buildings erected in the 1920s, may not qualify for Fannie Mae-backed mortgages because of deferred maintenance issues.
Fannie Mae’s rules now require that lenders and appraisers review a laundry list of items before mortgage approval, including the following documents:
- The declaration, or covenants, conditions and restrictions (CC &R), bylaws, house rules and regulations.
- Board-meeting minutes, state mandated disclosures, prior and current year budgets, and the reserve study.
“Doc fees can range from $50 to $250 per document, so the price can really add up depending on the number of documents requested,” Benson said. “On average, fees may run in excess of $500 for electronic delivery for a complete set needed to complete a condominium sales transaction.”
Reviewing condo documents is critical, consumer advocates say, because buyers need to know well in advance if the association being bought into has costly deferred maintenance issues, is on the brink of bankruptcy – or fiscally fit and a sound investment.
“You wouldn’t want to get hit with that $50,000 special assessment six months after the closing, would you?” Benson asked. Some special assessments have exceeded $100,000 per unit.
The new Fannie Mae regulations cover current or planned special assessments. Even if paid in full, they must be reviewed. The lender must document the reason for the special assessment, the total amount assessed, and repayment terms.
Fannie Mae also requires the following information:
- Documentation to support that the special assessment will not create a negative impact to the financial stability, viability, condition, and marketability of the project.
- The lender is expected to obtain the financial documents necessary to confirm the condo association or HOA 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 project is not eligible.
“Fannie Mae needs a reality check if it believes the necessary information for lenders and appraisers is easily accessible from sellers and buyers or real estate agents,” Benson said. “The gatekeeper is typically the property management company that charges for the information, a practice that only took off after the 2008 real estate collapse.” At that time, management companies were struggling to increase their bottom lines by reselling condo documents for a profit.
“Board meeting minutes are the only place where an upcoming special assessment may be discussed – for example, gathering bids for roof work or structural reconstruction that has not been levied at the time of the sale,” Benson noted.
“What if the property has not yet transferred, and the special assessment has not yet been levied?” Benson asks. “How is the appraiser and/or lender going to review meeting minutes to address undisclosed upcoming special assessments?
“Who is going to pay the fees to the property management companies for necessary compliance and disclosure?” Benson asks.
Regarding documents, most governing instruments and state statutes were created long before online delivery was a possibility, consumer advocates note. They allow for a “reasonable cost” of copying documents.
However, in the age of the Internet, association documents are frequently stored electronically and can be shared with a simple click of a mouse. There is no paper, ink, or shipping costs. There is no manpower time associated with copying docs and sending them to the buyer via U.S. Mail or Fed-Ex delivery.
“Despite this, most management companies – and some boards of directors – are using the documents as a literal profit center,” Benson said. “These are new expenses conjured up by property managers – charging fees for materials that are owned by the sellers or documents that are public record.”
Although the new Fannie Mae regulations are designed to protect sellers and buyers, the real question being overlooked is who pays the cost of the documents?
“Appraisers do not get paid enough to absorb the cost of hundreds of dollars in document fees,” Benson said. “Until Fannie Mae addresses the business model of reselling condo docs, the directives for document examination are nearly impossible to fulfill.”
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