Hot off the presses, Fannie Mae has issued new condominium project standards and property insurance requirements to address rising insurance costs and limited availability; improve financial stability of condo projects; simplify processes for lenders/servicers; and align with Freddie Mac and guidance from Federal Housing Finance Agency.
Why does this matter to community associations?
The condominium world has seen significant financial challenges in the last five years. Some condominiums have suddenly found themselves on a “Do Not Loan” list, and others have struggled to find required and affordable insurance. Most condominium loans are federally backed, either initially or through purchase of those mortgages post-closing. This means that lenders will generally refuse to issue a condominium loan on a project that does not satisfy Fannie Mae’s requirements. The Community Association Institute, an international membership organization dedicated to promoting the interests and needs of community associations, and other stakeholders have long lobbied for help from Fannie Mae in alleviating some of these issues. The letter issued today, and linked here, addresses many of these issues. Some of the changes will be immediately beneficial, and others may pose new or different challenges for communities trying to meet Fannie Mae’s lending criteria. Interested parties should read the letter in its entirety, but briefly:
- The new directives provide greater flexibility on which projects may be approved for federally backed loans. Fannie Mae has expanded its Waiver of Project Review program to projects with ten or fewer units and removed the investment property concentration limit of 50% in established projects reviewed as part of the Full Review option. This will significantly help communities with a high number of investor-owners.
- The new directives simplify the review process. Going forward, projects will either receive a Full Review or, if applicable, a Waiver of Project Review.
- The new directives provide stronger financial requirements for projects seeking approval. Previously, associations had to establish reserves of 10% of the annual budget so funds would be available for capital expenditures and deferred maintenance. The new standard will require that condominiums maintain at least 15% of the annual budget for these needs. This may pose a significant challenge to communities with memberships reluctant to approve increased regular or special assessments. The new directives would also tighten up reserve study compliance obligations.
- The new directives alter and simplify condominium insurance coverage obligations. Very small developments will see lesser insurance obligations and less strict documentation requirements. Larger communities will benefit from more flexible options to provide that the coverage they have is adequate, and will see the removal of an obligation to maintain full roof replacement or inflation guard coverage.
Various sections of the new guidelines will go into effect on a staggered basis. Many changes are effective immediately. Others will become effective through January 1, 2027.
If you have any specific questions about the new Fannie Mae guidance, we strongly recommend that you contact your community association attorney to discuss.