Homebuyers may find it more difficult to get loans for condos and co-ops with deferred maintenance due to lending changes stemming from last year’s condo collapse in Surfside, Fla.
Tighter condo lending requirements from Fannie Mae went into effect on January 1, 2022, nearly 7 months after 98 lives and 136 homes were lost in the Champlain Towers South collapse. Fannie Mae is one of two government-sponsored enterprises that back a majority of conventional home loans.
An investigation into the cause of the disaster revealed significant deferred maintenance not only in Champlain Towers South and the building surrounding it, but widespread safety and maintenance challenges in high-rise condos built in the late 1900’s.
According to a blog post from Fannie Mae director of single-family collateral risk management Jodi Horne, the new requirements make condos with “significant deferred maintenance or that have received a repair directive from a local regulatory authority or inspection agency” ineligible for a Fannie Mae loan until repairs have been made.
In simple terms: Fannie Mae won’t back loans for condos or co-ops with known safety and structural issues. And if Fannie won’t back the mortgages, lenders will be more hesitant to offer them to condo buyers.
A October lender letter from Fannie Mae defines “significant deferred maintenance” as projects that:
- Require full or partial evacuation for more than seven days to complete repairs
- Affect safety, soundness, or structural integrity
- Need substantial repairs or rehabilitation
- Impede the function of major structural or mechanical elements, such as foundation, roof, load bearing structure, electrical systems, HVAC, or plumbing
Fannie also updated its eligibility review requirements for itself and lenders, and reminded appraisers and lenders that condo appraisals must document special assessments (maintenance costs) and deferred maintenance.
How Fannie Mae’s updates help homebuyers
Special assessment documentation has the potential to alert buyers to hidden maintenance costs that, in some cases, have cost condo-owners upwards of $300,000. Fannie is requiring lenders to document the total amount and repayment terms for special assessments and obtain the financial documents that prove the condo association has the ability to fund any repairs.
Without this documentation, homebuyers could unknowingly buy a condo unit that comes with a six-figure bill for deferred maintenance costs.
In addition to special assessment documentation, Fannie Mae is strengthening its requirement that condo boards keep a 10% budget reserve for deferred maintenance. Previously, it allowed lenders to obtain a “reserve study” in lieu of the 10% budget requirement.
Altogether, Fannie Mae’s updates are meant to protect homebuyers from the hidden physical and financial dangers of deferred condo maintenance.
A 2020 survey by the Community Associations Institute found that 81% of condo managers, board members, and contractors encountered “unanticipated and unplanned-for infrastructure issues over a recent three-year period.”
The report also found that condo associations often go for the quick fix before addressing the underlying problem.
“In many cases, the underlying cause of the problem was known, however the community delayed correcting the actual cause because association decision-makers wanted to attempt a minor repair to control the damage or they needed time to develop a financial plan for the repairs.”
Maintenance costs are part of living in a condo or co-op – just as they are for single-family homes. At the very least, the new Fannie Mae requirements could protect condo buyers from the hidden costs and dangers of deferred maintenance. They also have the potential to nudge condo associations toward addressing major repairs instead of opting for quick fixes.