New York's Cooperative and Condominium Community

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Fannie Mae Shakes Up the Co-op and Condo Lending Game

Paula Chin in Bricks & Bucks on September 8, 2022

New York City

Fannie Mae, lending rules, Florida condo collapse, reserve funds, assessments.

New forms from Fannie Mae dig into the physical and fiscal condition of co-ops and condos.

Sept. 8, 2022

Fannie Mae, the federally backed mortgage giant, has changed its lending rules.

“In the past, Fannie Mae bought apartment loans based on a building’s financial health,” says Jerry Niemeier, an authority in co-op lending. Then came the deadly Florida condo collapse. “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.”

Lenders will now place the burden of proof on co-op and condo boards to show that repairs have been made or are planned — and funded — before they will issue mortgages to potential apartment buyers. 

To this end, co-ops and condos are 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.

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.”

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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,” says Mitchell Unger, a partner and the controller at the Lovett Group, a property management company. “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.”

The upshot: 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.

And the new rules are here to stay. “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 Corp., 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.”

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