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Selling a Condo? Know Fannie Mae!

Article written by Jack Carr, P.E., R.S., LEED AP, Criterium Engineers
 
In the last two years, FannieMae has amended it guidelines for selling and serving mortgages on condominiums, cooperatives, and Planned Unit Developments three times. Maine and New England condominium associations and sellers should be paying attention, as failure to meet these new rules may make some condos unsalable.
 
Today, 70 percent of all mortgages are sold on the secondary market. FannieMae, and its sister GSE, Freddie Mac control roughly 90 percent of that. In short, if there are to be buyers of condominiums, condominiums need to be able to satisfy FannieMae’s requirements necessitating associations and sellers being aware of the new rules.
 
Fannie Mae was created as part of the New Deal to purchase Federal Housing Administration (FHA) loans. Banks had stopped lending for housing (sound familiar?) and this was a way to bring low cost money back into the market. FannieMae became a private company in 1968. Capital was raised to buy mortgages and resell them as mortgage-backed securities. 
 
This has traditionally been referred to as the secondary market. It exists to ensure a ready supply of mortgage capital to the market. Although some banks, and small Savings and Loans in particular, still retain some mortgages in their own portfolio, most mortgages are sold to the secondary market. 
 
Further, most originators would like to keep that option open; that is, to sell the mortgages in the future, even if they do not do it now. That is why FannieMae underwriting guidelines have become the de facto standard throughout the mortgage industry.
 
FannieMae was originally established as the Federal National Mortgage Association. Freddie Mac (or the Federal Home Loan Mortgage Corporation) was created in 1970 because of FannieMae being perceived to have a monopoly on the secondary market. Collectively, these and a few other agencies are referred to as GSE’s or Government Sponsored Enterprises.
 
The three new guidelines to be aware of are:
  • Announcement 07-18:  Lender Delegation of Project Review Processes and Related Changes – November 15, 2007
  • Announcement 08-01:  Amends Guides “Selling” and “Servicing” – January 31, 2008
  • Announcement 08-34:  Amends Guides “Selling” – December 16, 2008  
The guidelines’ first requirement is that the association maintains an “adequate budget.” Adequacy is not defined, except for some of the following conditions.  
  • Capital Reserves must represent at least 10 percent of the budget. This may often not be enough. But it does establish a threshold for reserve funding that all associations should be cognizant of. The CAI Complete Guide to Reserve Funding (GAP Report 24) defines “Threshold Funding” as the method of establishing reserves wherein the “minimum reserve cash balance . . .is set at a predetermined dollar amount.
  • The insurance deductible must be funded in the budget. Although there is no stated requirement for this to appear as a line item in the budget, the deductible may be considered another component of the threshold in establishing reserves.
  • The requirement for insurance coverage has changed. Formerly, associations had to maintain “all-in coverage” meaning that the policy covered losses in both common areas as well as within individually owned units. This has now changed. It is possible for unit owners to obtain what is known as HO-6 coverage, which covers elements from the “walls in.” When that is the case, the association need only maintain coverage on the common elements. This can reduce premiums for the association, but requires consistent enforcement in the bylaws and regulations.
Additional requirements relate to general ownership of other units. For example:
  • The loan-to-value ratio varies with type of ownership, with owner-occupants viewed more favorably than investors.
  • More than half the units (51 percent) must be owned by owner-occupants or as second residences.
  • No more than 15 percent of the units can be delinquent.
  • No more than 20 percent of the total square footage can be for commercial purposes.
  • Individual units must be separately metered or have a plan for the ready adoption of same.
  • If a new project, the number of units that must be under contract has increased from 51 percent to 70 percent. In addition, new condominiums are subject to FannieMae’s Project Eligibility Review Service (PERS).
There are other guidelines and regulations as well. Associations should always consult with their attorney to review their role in the underwriting process. Also, make sure the association’s reserve study provider, includes those requirements in the reserve study that are specific to the obligations of the association under the new guidelines.
 
So the message is clear. In today’s market it is not just the buyer who should beware. When it comes to these new guidelines, so should the seller and the association. 
 

© CRITERIUM ENGINEERS 2009