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There was no reason to worry, right? The buyer, trying to get a loan for an apartment in an Upper East Side condominium, would have no reason to think the Federal National Mortgage Association, commonly known as Fannie Mae, wouldn’t back it. The postwar, full-service property was in good financial shape with a healthy reserve fund and had invested heavily in capital improvements. “This is the type of building that should be approved with a rubber stamp,” said James Goldstick, vice president of Mark Greenberg Real Estate, which manages the Upper East Side property and other condos and co-ops in New York City and Nassau County.
It may have seemed like a sound investment, but Fannie Mae did not agree. Last December, the agency refused to back a mortgage unless the condo increased its capital improvement reserve fund from 6 percent of its operating budget to 10 percent.
That’s not an anomaly either. Since 2007, Fannie Mae, along with the Federal Home Loan Mortgage Corporation (known as Freddie Mac) and the Federal Housing Administration (FHA) – the three agencies that together underwrite the majority of mortgages in the country – have been tightening their guidelines.
Because banks rely on these guidelines to resell mortgages, no major lender will sign off on a loan that the mortgage giants won’t back. Fannie and Freddie underwrite mortgages up to $625,500 in the New York City area. The federal government recently raised the limit for FHA-backed loans to $729,750.
Condos now face stringent new restrictions that make it difficult for buyers to get loans and residents to refinance. Even co-ops, whose rules have largely gone unchanged, are seeing units in their once-desirable buildings rejected for loans because the building doesn’t meet Fannie’s standards.
Board members are finding that they must make substantial changes to how their buildings are managed if they want their residents to be able to sell or refinance their homes.
“It’s pretty cut-and-dry. Comply and you’ll get your loans. Don’t, and you have to dance,” said Josh Koppel, president of H.S.C. Management, which manages properties in all five boroughs.
In the case of the Upper East Side condo, Goldstick assumed the building was in the clear. The building had commissioned a $5,000 engineering study in 2010 that found that a six percent capital improvement fund was sufficient and Fannie had granted the property a waiver.
But a year later, the engineering study was no longer enough. The building was left with two choices: increase its capital improvement fund or go through a Project Eligibility Review Service (PERS) to get approval. PERS is expensive, valid only for a year, and comes with no guarantee that a building will get Fannie’s approval. It costs $1,200 plus $30 for each unit in the building. And that’s before legal and appraisal fees. “Fannie Mae is no longer being flexible with building-by-building situations,” says Goldstick.
For all the challenges, there are steps condo and co-op board members can take to make their buildings more attractive to lenders, ensuring that their residents won’t run into unexpected roadblocks when they try to sell or refinance.
Fill the Capital Improvement Coffers
If there’s anything Fannie and Freddie want to see in a building’s operating budget, it’s a line item stating that 10 percent has been set aside for capital improvements. For buildings that have no capital improvement reserves, it is time to start saving, says Stephen Beer, an accountant and principal in Czarnowski & Beer, who represents buildings in Manhattan, Queens, New Jersey, and Florida.
Take a close look at a building’s reserve fund and see if there are places where cash can be moved. If the autumn was unseasonably warm, for example, there may be money left over from the heating oil budget that can be shifted into the capital improvement pot. Building managers can either put the entire 10 percent away at once, which can mean a major hike in maintenance fees, or take smaller steps over several years to reach 10 percent. Fannie will sometimes grant a building a waiver if it shows that it is taking significant steps toward meeting the guidelines. “The board has to decide if they’re going to fully bite the bullet or partially bite the bullet,” says Beer.
Know Your Lenders
If board members don’t know where their building stands with the major lenders, find out. Keep abreast of which banks, if any, have denied loans to buyers and find out why. Housing conferences are good places to meet lenders and project review officers.
If no one has sold a unit or refinanced in several years, speak with a loan officer and request a review to find out where the building stands so problems can be addressed before a loan is denied. Lenders have the ability to speak with Fannie directly. “Before we get a loan coming in, let’s find out what the problem is,” says one loan officer. “There haven’t been that many people who’ve been very proactive.”
Keep on Top of Paperwork
If there is one thing a bank needs when considering a loan, it’s paperwork. The more organized a building is about its financial and insurance documents, the easier the whole process will be. Keep those documents current and up to date.
“They need to actively maintain their approvability with the major lenders by ensuring that their financials and insurance documents are easily available when somebody is looking for them,” notes Jan William Scheck, a branch manager at DE Capital Mortgage, an affiliate of Wells Fargo and Prudential Douglas Elliman.
Choose Insurance Wisely
One of the things Fannie and Freddie consider when approving a loan in a condo or co-op is its insurance policy. Make sure the building’s policy is compliant with the lending agencies’ rules. Otherwise a building may find itself in a position where a buyer is denied loans because the building’s policy isn’t adequate. “Pay attention to who they get their insurance with. Don’t be penny-wise and pound-foolish about it,” observes Scheck.
Koppel of H.S.C. Management had one loan kicked back to him in 2010 because the building didn’t have adequate crime insurance. In another case, the bank wanted to be endorsed on the property and liability insurance policy.
Resolve Major Lawsuits
If there is anything that will absolutely stop an approval in its tracks, it’s serious litigation. If a building has a lawsuit that is not covered by a building’s liability insurance, it needs to be resolved. “It’s like trying to lend to somebody in the middle of a divorce,” Scheck notes.
Keep Your House in Order
Don’t run a deficit. If a building does, it will be hard pressed to get a green light from the lenders. Lenders look fondly on large cash reserves and healthy (and available) lines of credit.
If there are big-ticket capital improvements on the horizon, start preparing for them well ahead of time. “If you’re going to have a roof replaced in three years and you don’t have a lot of money in your reserve fund, start the assessments three years in advance,” says Goldstick.
Limit the Sublets and
Among the biggest Fannie and Freddie changes to hit condos are new limits on sponsor-owned units. Fannie and Freddie now require that 90 percent of all units be owner-occupied. This can be a major problem for new construction and older buildings that converted to condos and have a large number of rental units. For buildings that don’t make the cut and can’t get a waiver, they may have no choice but to go through a project eligibility review.
Co-ops need to keep sublets in check. Too many and Fannie may put the kibosh on a loan. An Upper West Side co-op that is planning to refinance in 2013 put the brakes on a family’s plans to sublet their unit while their daughter was in France. It relented only when the family paid the co-op a fee and drafted a lease agreement that limited the sublet to a single year, says Koppel.
Know the Rules
The rules of the game have changed, and they’re continuing to change. Whatever those rules may be – and each of the three agencies has its own requirements – a building will be required to comply with them if it wants to see loans get approved. So keep up on the regulations.
“The rules that we have today may not be the rules that we have tomorrow,” says the loan officer. “But what’s going to change and how it’s going to change, I don’t know.”