Bill Morris in Co-op/Condo Buyers on July 23, 2014
Water, Water Everywhere
The trouble began last October, when questions the water in the building was shut down for about eight hours for scheduled maintenance. After 10 p.m., long after the work should have been completed and the water turned back on, Chris Forte, the co-op board's president for 17 years, saw water spewing out of the toilet in his apartment. Forte, a retired lawyer with the federal government, knew something was wrong.
"At some point after the plumber turned the water back on, the pressure caused the toilets to explode," Forte says. "The bowls just gave."
As is to be expected, the injured residents started talking to attorneys and the co-ops insurance carrier, Greater New York Mutual Insurance, appointed a lawyer to defend the co-op. Yet while the three suits that were eventually filed were not unexpected, they omitted a crucial piece of information: a dollar amount of damages, compensatory and punitive, that the injured parties were seeking.
On the day the toilets exploded, six sales were in progress, with financing secured. Then the board got a surprise. "Brokers who thought they had done deals discovered that the banks weren't going to go through with the loans because Fannie Mae wouldn't buy the mortgages," Forte says. "I was surprised. I knew we were going to be sued, but I didn't know that would interfere with the way business gets done."
The "Selling Guide"
Why did Fannie Mae stop backing the loans? The answer is in the "Selling Guide," which lays out which loans Fannie Mae deems eligible for purchase and which loans it does not. Fannie Mae will not buy a loan in a condo or co-op "for which the homeowners' association or co-op corporation is named as a party to pending litigation, or for which the project sponsor or developer is named as a party to pending litigation that relates to the safety, structural soundness, habitability or functional use of the project."
The exception is if Fannie Mae determines that the pending litigation involves "minor" matters — which according to the guide includes "litigation for which the claimed amount is known, the insurance carrier has agreed to provide the defense, and the amount is covered by the association's or co-op corporation's insurance."
Caton Towers meets two of these three criteria. GNY has agreed to provide legal defense, and the corporation appears to have adequate insurance coverage — a $50 million umbrella policy, in addition to liability coverage. Through no fault of its own, though, the board is unaware how much money the three lawsuits hope to collect in damages, which means that Fannie Mae will not back the loans.
With that in mind, the co-op's legal team is working to get that decision reversed. "I've been advised by counsel that they're going to try to get a specific damage demand, then take that to Fannie Mae, along with the fact that the co-op has a $50 million umbrella policy," says board president Forte. "Whatever happens, we're sufficiently insured."
Click image to enlarge.
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?