Deal Killer: New Fannie Mae Rule Freezing Sales at Healthy Buildings

Fannie Mae's newly updated "Selling Guide" — which outlines what lenders who want to sell their mortgages to Fannie Mae aren’t allowed to do — slaps this new limit not only on cooperatives, but also on condominiums.

Most of Fannie Mae's roughly two dozen strictures — which apply both to condos and co-ops, except for five that are co-op-specific — don't affect the vast bulk of such residential buildings. "For the most part," says Jerry Niemeier, vice president of risk management/co-op lending at Nationstar Mortgage, "mainstream residential co-ops and condos are not going to have an issue with" guidelines stating that the co-op/condo is not a timeshare, a continuing-care facility, made up of houseboats, or fits into other narrow categories involving zoning and other legalities.

But in this latest update two things in particular involve co-op/condo commercial space. The first — a good thing — is an increase in the amount of allowable commercial space in a condo, from 20 percent to 25 percent. The other, unfortunately, involves "non-incidental business operations owned or operated by the [Homeowners Association], including, but not limited to, a restaurant, spa, or health club."

According to industry experts, Fannie Mae regards any income from sources not directly benefiting residential life to fall within the 15 percent stricture. Things that benefit residents include income from laundry rooms and community rooms. Commercial lease income or income from a cell tower does not.

Fannie Mae did not respond to numerous requests for comment.

There is a workaround for this problem, though. Lenders can request an exception. And many do, says Nationstar's Niemeier. "Someone from the lender will talk to Fannie Mae and say, 'We'd like to have a waiver,'" he explains. "It's not a loophole," he notes, "but a formal process called a credit variance administration system. We might say, 'This co-op gets 20 percent of its income from [a cellphone] roof antenna. And this income is sustainable because there are three contracts with, say, Verizon, T-Mobile, and Sprint.' After a lender gets that waiver, the lender has the ability to sell that loan to Fannie Mae."

Indeed, this may be an out for buildings that have just signed 20- or 30-year leases with a supermarket, pharmacy, bank, or even a master lessee who, in turn, sublets commercial space. With such long-term leases in place, and depending on the retailer, Fannie Mae might well approve a waiver.

In the meantime, Niemeier points out, some lenders don't bother with selling to Fannie Mae, and so the Fannie Mae guidelines are moot. "They will do 'portfolio lending,' where they make a loan to what's called a 'non-warrantable co-op or condo,' and hold onto that loan until the particular co-op or condo meets Fannie Mae guidelines," if it ever does.

Have your board professionals read exactly what Fannie Mae says. Click here for the updated Selling Guide of March 31 2015. And click here for the initial announcement of Nov. 10, 2014.