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PASADENA, Calif. \u2013 Can the condo world live without mortgage giants Fannie Mae and Freddie Mac and their more affordable financing terms?<\/span><\/span><\/p>\n

A fast-developing crisis is hitting condominium association boards and property management companies across the country tasked with filling out Draconian questions required of HOA property management companies.<\/span><\/span><\/p>\n

In consideration of last year\u2019s Champlain Towers condo collapse that killed 98 people, Fannie and Freddie rightfully want to know if America\u2019s condo complexes have deferred maintenance or structural safety issues. To that end, the agencies on Jan. 1 and Feb. 28 instituted new questionnaires for certain applicants regarding the structural integrity of the condo community and whether any code violations are anticipated.<\/span><\/span><\/p>\n

And now a questionnaire boycott of sorts is happening.<\/span><\/span><\/p>\n

\u201cThe questionnaire is Draconian. It\u2019s freaking out boards of directors and managers,\u201d said Adrian Adams, founder and managing partner of law firm Adams-Sterling, who advises and represents condo boards. He said several boards have already decided \u201cdo not answer these questionnaires. They don\u2019t even want Fannie and Freddie loans.\u201d<\/span><\/span><\/p>\n

Erik Rivera, president and CEO of Manhattan Pacific Management, manages 60 condo (specific) community associations. \u201cFour to five will probably go the (Fannie, Freddie) boycott route,\u201d Rivera said.<\/span><\/span><\/p>\n

The condo questionnaire, it should be noted, is not applicable for certain associations, such as townhouses or planned unit developments, for example. Another exclusion is a single-family neighborhood with a community association.<\/span><\/span><\/p>\n

Beyond the matter of righteous safety matters, other probing questions, such as, \u201cIs the HOA\/Cooperative Corporation aware of any deficiencies related to the safety, soundness, structural integrity, or habitability of the project\u2019s building(s)?\u201d may be legal traps, of sorts, to deflect future liability away from Fannie and Freddie.<\/span><\/span><\/p>\n

Recently, Community Associations Institute (CAI) sent a survey to its condo and co-op boards and managers. Early results from 48 respondents indicate 36.8% of mortgage applicants in their HOAs were denied credit because of the new Fannie, Freddie questionnaire. Separately, 31.5% of borrower closings were delayed, according to survey results. Seven of the 48 HOA respondents were from California.<\/span><\/span><\/p>\n

It\u2019s not clear if these denials were purchase loans or refinance applicants. It\u2019s also not clear what information provided in response to the F&F backed questionnaires caused the loan denials, according to Dawn Bauman, senior vice president of government affairs at CAI.<\/span><\/span><\/p>\n

More than 89% of the survey respondents feared exposure to liability because the questions were beyond their knowledge and expertise. Almost 74% of respondents feared exposure to liability for not answering questions (on behalf of the mortgage applicants). From my view, the perception seems to be if the HOA representative does not answer and the lender denies the loan, then the HOA rep and others may be liable to the borrowers.<\/span><\/span><\/p>\n

It\u2019s very early in this new HOA questionnaire world, but Rivera already knows of one lender denial due to the way the HOA answered.<\/span><\/span><\/p>\n

\u201cWhen an engineering report is pending, for example, and we respond to the questionnaire as such TBD, sometimes that\u2019s not good enough for the lender,\u201d Rivera told me. \u201cOther questions we refer the lender to the association attorney, and they don\u2019t like that, either.\u201d<\/span><\/span><\/p>\n

Fan and Fred have been touting the new questionnaire as optional, not mandatory. I\u2019ve read it on their websites, and I observed it on a webinar featuring Fannie and Freddie condo experts. And they made that claim in a Wall Street Journal article on Feb. 20.<\/span><\/span><\/p>\n

As an alternative, Fan and Fred offer to accept underwriter assertions of several board minutes reviews, engineering report reviews and local government inspector reviews. However, there\u2019s a fat chance any underwriter has the enormous amount of time needed to research (or the expertise) to understand these complicated matters.<\/span><\/span><\/p>\n

And if the underwriter provides this \u201cgood to go\u201d assertion and something was missed or was not addressed at all, then the underwriter\u2019s employing lender may eventually be liable.<\/span><\/span><\/p>\n

Lenders I spoke with literally laughed when I raised this Fan and Fred alternative to the HOA questionnaire.<\/span><\/span><\/p>\n

To be fair, about 50% of the loans we run through Fannie and Freddie\u2019s underwriting engines at my mortgage brokerage shop provide for a limited review. For many lenders, this limited review means a much shorter list of HOA questions. These limited review questions may not include the matter of deferred maintenance. But even that topic is getting murkier by the day as lenders worry about these condo safety concerns.<\/span><\/span><\/p>\n

Mortgage lenders are in the business of making mortgages. Every lender I\u2019ve interviewed (all off the record) about this new HOA issue is hopping mad. They complain Fannie and Freddie are providing little clarity and direction. They are leaving it to subjectivity and underwriter judgment when they receive these wonky HOA responses.<\/span><\/span><\/p>\n

Since Fan and Fred have had a long history of making lenders buy loans back later over sometimes nonsense issues, lenders don\u2019t trust the agencies in the abstract. So when in doubt, decline the loan. It\u2019s simply not worth the battle or the expense of the buyback.<\/span><\/span><\/p>\n

\u201cFreddie Mac\u2019s requirements are designed to help ensure residential buildings with aging infrastructure are safe for their residents and the condos and co-ops needing critical repairs have a plan to do so,\u201d said a Freddie Mac spokesperson.<\/span><\/span><\/p>\n

Condos typically represent the most affordable homeownership. The biggest losers in this new, temporary HOA format are folks that need more affordable housing, underserved borrowers, minority borrowers and first-time buyers.<\/span><\/span><\/p>\n

It\u2019s obvious the very important safety and maintenance questions could have been posed on the HOAs in a much less threatening way. Taxpayer-owned Fannie and Freddie are on the inside looking out. They think it\u2019s their gold and it\u2019s their rules. It\u2019s too bad it usually takes a policy crisis for them to pay attention.<\/span><\/span><\/p>\n

\u201cThey will likely change (these forms) this summer,\u201d said Robert Nordlund, founder and CEO of Association Reserves who consults with Fannie and Freddie. \u201cThey are government entities. They move slowly.\u201d<\/span><\/span><\/p>\n

Fannie and Freddie declined to comment for this column.<\/span><\/span><\/p>\n

\u00a9 2022 Pasadena Star-News. All rights reserved. Reproduced with the permission of Media NewsGroup, Inc. by NewsBank, Inc. Jeff Lazerson is a mortgage broker.<\/span><\/span><\/p>\n<\/div><\/div>\n

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\nAuthor: kerrys<\/p>\n","protected":false},"excerpt":{"rendered":"