The buyer, trying to get a mortgage to purchase an Upper East Side condominium, had no reason to think the Federal National Mortgage Association, commonly known as Fannie Mae, wouldn't back that loan. The 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," says James Goldstick, vice president of Mark Greenberg Real Estate, which manages the Upper East Side property. But Fannie Mae didn't agree: Last December it refused to back any mortgage there unless the condo increased its capital-improvement reserve 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 these mortgage giants won't back. Fannie and Freddie underwrite mortgages up to $625,500 in the New York City area, and the FHA up to $729,750.
Board members are finding 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," says Josh Koppel, president of H.S.C. Management.
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 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.
For all the challenges, there are eight 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.
1. 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.
Take a close look at your 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.
2. 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."
Thinking of buying a co-op or condo? Already bought, and not sure how co-op/condo life and rules work? Learn all about purchasing a place and living in your new community. It's not like renting, and its not like owning a house. What's it like?