Bulletin UNNAT-Bulletin-2021-009-Temporary FNMA Requirements for Condominium and Co-op Projects

Background:

On October 13, 2021, the Federal National Mortgage Association (“FNMA”), which purchases residential loans and the mortgages which secure them, announced new lending standards in the wake of the collapse of the Champlain South Tower in Surfside, Florida. The new FNMA requirements can be found here - https://singlefamily.fanniemae.com/media/29411/display (also attached to this bulletin).

This issue is of high importance to the title insurance industry, since it may affect the ability of some buyers of condominiums and cooperatives to obtain new mortgage loans while these temporary requirements are in effect.

FNMA has taken the position that loans secured by units in condo and co-op projects with significant deferred maintenance, or 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. These projects will remain ineligible until the required repairs have been made and documented.

Additionally, projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or are not eligible for FNMA-backed loans.

These policies do not apply to routine maintenance or repairs that a homeowners’ association (HOA) undertakes to maintain or preserve the integrity and condition of its property. Also, if damage or deferred maintenance is isolated to one or a few units, and those units do not affect the overall safety, soundness, structural integrity, or habitability of the improvements, then these project eligibility requirements do not apply unless the property to be insured is affected.

Properties with Special Assessments:

Any condominium or cooperative project with a current or planned special assessment, even if paid in full for the subject unit, must be reviewed by FNMA to determine acceptability. The lender is expected to obtain the financial documents necessary to confirm the association 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. Additionally, If the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.

HOA and Co-op Reserve Requirements:

FNMA will also review condo and co-op reserve requirements for projects which exhibit significant deferred maintenance. FNMA may dictate reserve requirements in excess of its usual standards in such cases. Implied in this language is the possibility of large increases in condo or co-op dues in order to account for deferred maintenance needs.

Conclusion:

Although FNMA’s new requirements do not appear to affect title insurance transactions directly, the title insurance industry should expect delays and the possible cancellation of mortgage applications for certain sales or refinances of residential condominiums or cooperatives. This concern is expected to increase over the next decade as the majority of residential condo and co-op buildings were built more than twenty years ago.  Older buildings increase the possibility of the presence of deferred maintenance.

For additional information about this Bulletin, please contact your FNTI state underwriter.