NEW BANKING REGULATIONS RELATED TO CONDO AND CO-OP PROJECTS

In October 2021, the Federal National Mortgage Association was the first to announce updates to its guidelines and criteria changes for Condo and Co-op Projects.  These changes came in the wake of the tragic collapse of the Champlain South Tower in Surfside, Florida, a residential building with aging infrastructure and significant deferred maintenance.  With the growing concern surrounding the age of residential condo and co-op buildings, lenders and other industry stakeholders have asked for clear guidance on how to manage emerging risks related to residential projects.

In response to the concerns about projects with significant deferred maintenance, FNMA and FHLMC issued requirements that impact the eligibility of attached unit condo and co-op projects with five or more units, regardless of the type of project review or review waiver.

Since November 2021 all investors follow all the following guidelines and criteria changes announced by FNMA and FHLMC.

There are three main elements of the updated guideline, including significant deferred maintenance, special assessments, and insufficient reserves:

Significant Deferred Maintenance

Projects are ineligible if there is significant deferred maintenance that impacts:

1. Structural integrity
2. Safety
3. Use of the project

Special Assessments

Projects “might” be ineligible if there are special assessments due to:

1. Serious structural conditions
2. Code violations
3. Impact on Financial wellness
4. Impact on marketability

Insufficient Reserves 

Projects “might” be ineligible if there are insufficient reserves due to:

1. Serious structural conditions
2. Code violations
3. Significant deferred maintenance
4. Safety

There are a few additional points worth mentioning.

• FNMA no longer offers a reserve study option to go below 10% reserves
• FHLMC considers anything over $3,000 to be a major maintenance deficiency.
• Appraisers must visibly review all readily accessible areas of the project, not just the unit being appraised, for deferred maintenance.
• Appraisers must review all special assessments to determine if there is an impact on value, marketability, etc.

For more information regarding the new guidelines and requirements for Condo and Co-op Projects, reach out to a member of our Real Estate Team.