New York's Cooperative and Condominium Community
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The federally backed mortgage giant changes the rules — and to keep apartment sales moving, boards must pay attention.
Call it the domino effect. In the wake of the deadly June 2021 condominium collapse in Surfside, Fla., Fannie Mae, the federally backed mortgage giant, announced that it would no longer guarantee mortgages for apartment buyers in co-ops or condos unless lenders can provide proof that the buildings are structurally sound.
Lenders, in turn, have responded by placing the burden of proof on boards to show that repairs have been made or planned before they will issue mortgages to buyers in their buildings. While that process may seem straightforward, it is turning out to be anything but. And it’s boards that are bearing the brunt of the new rules — and dealing with the financial fallout.
Raising the Bar
Fannie Mae set the pieces in motion when it implemented its new guidelines in January 2022. Many New York lenders sell their co-op loans and condo mortgages to Fannie Mae (the nickname for the Federal National Mortgage Association), which then sells them to investors in the form of mortgage-backed securities. “In the past, Fannie Mae bought apartment loans based on a building’s financial health,” says Jerry Niemeier, an authority in co-op lending. “Now Fannie Mae is asking lenders to essentially certify that there are no significant deferred maintenance issues or unsafe conditions in the building. And if repairs are needed, they have to demonstrate that boards have the ability to pay for them.”
As a result, co-ops and condos are literally being put under the microscope. Fannie Mae has expanded the form it requires lenders to submit to boards and their property managers before deciding to finance a purchase in their building, which now includes detailed questions about the building’s inspection history and its action plan to remedy deficiencies — and even asks for copies of board-meeting minutes. “Lenders are going over building documents with a fine-tooth comb,” says Mitch Unger, a partner and the controller at the Lovett Group, a property management company. “They’re taking a deep dive because they want to ensure that Fannie Mae’s requirements are being met.”
That includes poring over audited financial statements, which are often required by banks before approving loans to individual apartment buyers. While lenders are reviewing balance sheets and cash-flow statements as usual, they’re now giving extra scrutiny to reserve funds and special assessments. “Typically, assessments are discussed and voted on in the minutes, which accountants always read,” says Darren Newman, the managing partner at the accounting firm Newman Newman & Kaufman. “If there is an assessment, we obtain the shareholder notice letter that describes what it’s for and how it’s being implemented.”
All of that information is included in the financial statement — specifically, in the footnotes, where accountants are required to disclose anything that potentially affects the building’s financials, including plans for future major repairs and how they will be financed. And lenders are reading the fine print closely. “They’re looking at the reason for the assessment, the size and repayment terms, and documentation to support it’s not going to negatively impact the financial stability of the cooperative or condominium,” Unger says. “But lenders are also tying in the footnotes with regard to any capital improvements that are being made. If the improvements are related to any substantial safety repairs or rehabilitation of the building and the lender sees that the assessment is not supporting all of these repairs, they will turn down the loan request.”
Indeed, the rules change by Fannie Mae is making it harder for people to buy into co-ops and condos. Under the new guidelines, condominiums must keep 10% of their operating budget in their reserve fund, but that’s no guarantee that lenders will come through. “We’re seeing many more properties in New York where lenders are denying loans, easily 200 or so a month,” says Orest Tomaselli, the president of project review at CondoTek, a technology and information company that works with condo lenders.
It’s not just a local problem. In a national survey conducted in April by the Community Associations Institute, a condominium trade association, 25% of respondents said they experienced a lender denial due to issues related to Fannie Mae’s revised questionnaire, not concerns pertaining to building safety.
The process can be daunting for co-op boards as well. In some cases, lenders are asking to see board minutes on any item in the questionnaire where the answers might potentially raise a red flag. “It’s up to each lender how to interpret the new guidelines, but they’re erring on the side of caution to avoid the risk of Fannie Mae rejecting the loan and the lender having to buy it back,” says Niemeier, the lending expert.
All of which is causing big headaches for boards. “No one wants to release their minutes to any outside party because they contain a lot of private and sensitive information,” says Leslie Bennett, the director of real estate sales operations at Einsidler Management. “There’s a lot of back and forth with lenders and mortgage brokers now, and it’s taking much more time and effort on the buildings’ side to get these deals done. It’s frustrating on every level.”
Frustrations aside, boards’ only option is to comply with lenders’ requests. “These new rules aren’t going away,” says Niemeier, adding that Fannie Mae — along with the other federally backed mortgage giant, the Federal Home Loan Mortgage Corporation, or Freddie Mac, which implemented the same rules in February — may further tighten the reins. “There could be more changes, and things could get even more strict as they try to correct any deficiencies or confusion in the new guidelines.”
Niemeier says attorneys are advising boards to be as forthright and transparent as possible when filling out the questionnaires. At the same time, they should proceed carefully when it comes to disclosure.
“Obviously you want to keep sales moving,” Unger says. “But before presenting this type of information to the public, be it minutes or audited financial statements, boards need to review everything thoroughly with their management company, attorney and accountant.”
The bottom line? Times have changed, and boards must adapt. “They have to be aggressive in dealing with unsafe conditions and may have to change their budgeting procedures to ensure that lenders will finance apartment purchases in their buildings,” says Tomaselli of CondoTek. “There’s an apathy that has built up among co-op and condo boards, because in the last 10 years mortgage financing was readily available through a multitude of lenders. If purchasers got rejected by one lender, all they’d have to do is apply to another, and they would be approved. That’s not the case anymore.”
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