New Fannie Mae and Freddie Mac Lending Requirements
New Fannie Mae and Freddie Mac Lending Requirements
Changes to Fannie Mae and Freddie Mac Lending Requirements
As a response to the tragic condo collapse in Surfside, Florida numerous changes have started to pop up in markets that directly impact associations including changes in the insurance industry and mortgage financing.
Things moved rather quickly with addendums to Fannie Mae and Freddie Mac being made at the end of December. For Fannie Mae those changes came into effect as of January 1, 2022 and the changes to Freddie Mac come into effect on February 28, 2022.
With so much changing and so quickly, it’s important to understand how this will impact your board, your association and community as a whole. To try and simplify things, let’s break it down and look at what Fannie Mae and Freddie Mac are, what the changes are, their impact and how your board and association should address them.
What are Fannie Mae and Freddie Mac?
To put it most succinctly, Fannie Mae and Freddie Mac are federally backed mortgage companies that were created by the United States Congress. Both companies buy home loans from lenders if the loan meets their underwriting requirements, and those purchases provide cash to lenders who then underwrite additional loans to buyers. Approximately 70% of all new mortgage loans are sold to Fannie Mae or Freddie Mac. Both are important for buyers as they provide additional and more competitive financing options.
How have the Fannie Mae and Freddie Mac Requirements Changed?
The Fannie Mae and Freddie Mac requirements have changed in a couple of ways. Some of the previously existing underwriting requirements have been expanded. An example of these changes is the number of rental units in a building which was increased from 30% to 50%. More importantly, major changes have been made to the condo questionnaire.
When a buyer goes through the mortgage application process, the mortgage company will request the completion of a condo questionnaire. Previously, the questions within the condo questionnaire were for the most part, straight forward and easy to answer. Questions about how many units are in the building, how many renters are in the building, when the building was built, and what is the reserve balance would be asked. These questions were typically answered by the property management company on behalf of the association and the board would not usually be involved in the process due to the objective nature of the questions posed.
Now the condo questionnaire has expanded to include questions about deferred maintenance, building safety, soundness, structural integrity, and habitability. It is the new version of the condo questionnaire that now must be answered by anyone looking to buy in condo, co-op buildings or townhomes with five or more attached units in a single building. FirstService Residential is involving their client boards as well as recommending legal guidance due to the subjective nature of the questions and the potential for significant downstream liability.
Answering questions about building safety, soundness and structural integrity are not so simple as a forensic inspection is typically required. That type of inspection can be quite expensive as it requires walls, ceilings and floors to be opened and the process is very labor intensive and time consuming.
How does this impact Minnesota?
Because Fannie Mae and Freddie Mac are federal programs, the new changes to the condo questionnaire are the same for every state regardless of state laws and requirements and that’s where things get a bit tricky.
For example, in Florida there is a legal requirement to have a building inspected by a licensed inspector or engineer every 40 years to ensure that it’s safe whereas Minnesota does not have this requirement. Making it difficult to answer questions about soundness and structural integrity of a building. As it currently stands in Minnesota, there is a legal obligation to provide a resale disclosure statement to the buyer of a unit within an HOA, but that requirement differs from the new Fannie Mae and Freddie Mac requirements in that only known issues must be disclosed.
That’s not to say that buildings in Minnesota aren’t inspected on a regular basis, they are an integral part of reserve fund planning, something that is legally required in the state. The question is, does that type of inspection provide the correct answer to the new questions in the questionnaire?
Typically, buildings in Minnesota do not have full forensic inspections performed that would speak to the structural integrity or habitability of that building. Most buildings have a problem that they identify, they call an engineering firm to come inspect that specific problem, and that firm makes recommendations to the board on how to correct that problem.
Many of the new questions don’t apply to Minnesota so it has become very difficult for associations to know how to complete this form to the best of their ability without it creating more of a problem.
How should boards respond to the new Fannie Mae & Freddie Mac lending requirements?
While there is no legal requirement to answer the new questions, not responding to them will result in the loan application not being processed and that would quickly create backlash from homeowners, buyers, and the real estate community. How the questions are answered can also lead to potential problems by creating downstream liability for an association that could be significant.
How quickly the new Fannie Mae and Freddie Mac requirements have come into effect is overwhelming for the condo and co-op, and townhome boards they affect. So how do you respond to lenders and provide the correct information while also protecting the association?
FirstService Residential Minnesota recommends boards proactively engage legal counsel and other professionals, as needed, to help draft responses to ensure the answers are accurate. Legal counsel will help your board get the proper balance between not answering the questions at all, while avoiding a large price tag and long wait time for a full forensic inspection that could lead to uncovering issues that would then have to be included in future resale disclosure statements.
Unfortunately, because of how quickly these changes have been implemented, it’s imperative the board act quickly to come up with a resolution for how they want these questions answered and what information they want to provide. Until the condo questionnaires are completed to the standards of the lending company, applications will not be approved and will quickly start to impact your community.
With changes happening so quickly, and more potential changes coming down the road, FirstService Residential will continue to keep on top of the latest regarding Fannie Mae and Freddie Mac to continue supporting associations navigate these changes to the best of their ability.