17-Jan-22 – The 2021 high-rise condominium disaster in Florida soon will have an impact in the Windy City.

Effective January 1, aging condo buildings in Chicago are under the regulatory microscope of Fannie Mae as a result of the tragic collapse of the Champlain South Tower in Surfside, Florida, which killed 98 people.

“Our condo and co-op project standards policies are designed to support the ongoing viability of condo and co-op projects nationwide,” Fannie Mae said in a recently issued nationwide memorandum to lenders and appraisers.

High-rise buildings with “aging infrastructure and significant deferred maintenance is a growing concern across the nation,” noted Fannie Mae. Its memorandum outlined tough new lending requirements for mortgage lenders who deal with condo and co-operative apartment loans from coast-to-coast.

“This concern is expected to increase over the next decade because the majority of residential condo and co-op buildings were built more than 20 years ago,” the memorandum reported. “Lenders and other industry stakeholders have asked for clear guidance on how to manage emerging risk related to these aging residential projects.”

As a result, Fannie Mae has issued new lending guidelines that impact the eligibility of condo and co-op projects containing five or more attached units, regardless of the type of project review or review waiver.

Analysts say the tougher restrictions could have a major impact on the sale and purchase of condos and co-ops in Chicago. Many lakefront high-rises date back to the 1950s and 1960s – some co-ops were built in the 1920s – and may not qualify for Fannie Mae-backed mortgages because of deferred maintenance issues.

Chartered by the United States Congress in 1938, Fannie Mae purchases residential loans from lenders to facilitate the flow of capital into the housing market by issuing and guaranteeing mortgage-related securities.

The guidelines, which will remain in effect until further notice, cover mortgages purchased in 2022 and loans delivered into mortgage-backed security (MBS) pools with issue dates on or after January 1, 2022.

So, condo and co-op buildings with significant deferred maintenance, or projects that have received a directive from a regulatory authority or inspection agency to make repairs due to unsafe conditions, will not be eligible for loan purchases by Fannie Mae.

These projects will remain ineligible for Fannie Mae-backed loans until the required repairs have been made and documented. Acceptable documentation may include a satisfactory engineering or inspection report, certificate of occupancy, or other substantially similar documentation that shows the repairs have been completed safely and with structural integrity.

Significant deferred maintenance includes deficiencies that meet one or more of the following criteria:

• Full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time.

• The project has deficiencies, defects, substantial damage, or deferred maintenance that is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements.

• Major components need substantial repairs and rehabilitation, including the building’s major structural or mechanical elements – foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.

Additionally, projects that have failed to obtain an acceptable certificate of occupancy or pass local regulatory inspections or recertifications are not eligible for Fannie Mae-backed mortgages.

However, the new guidelines do not apply to routine maintenance or repairs that a homeowners’ association (HOA) or condo association undertakes to maintain or preserve the integrity and condition of its property.

If damage or deferred maintenance is isolated to one or a few units and does not affect the overall safety, soundness, structural integrity, or habitability of the improvements, then the new project eligibility requirements do not apply.

For example, if water penetration occurs to a condo unit due to an isolated leaky pipe, or if there is damage from a small fire impacting the interior of a specific unit, the new loan guidelines do not apply. (Right) Major rebuild in 2013 of the north facade of Hemingway House, 1850 North Clark Street in Lincoln Park. Condo owners were slapped with a $12 million special assessment to cover water infiltration and tuck pointing.

The Fannie Mae directive also covers the following:

• Any current or planned special assessment, even if paid in full for the subject unit, must be reviewed to determine acceptability. The lender must document the reason for the special assessment, the total amount assessed, and repayment terms.

• Documentation to support that the special assessment will not create a negative impact to the financial stability, viability, condition, and marketability of the project.

• The lender is expected to obtain the financial documents necessary to confirm the condo association or HOA has the ability to fund any repairs.

If the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed or the project is not eligible.

Unless the lender or appraiser is able to determine that the special assessment has no adverse impact, the project would be ineligible for Fannie Mae financing.

The new requirements also suspend the marketing flexibility that allows a lender to obtain a reserve study in lieu of the condo project meeting a 10 percent budget-reserve requirement.

“Reserve studies are an important tool to help condo associations and HOAs plan for future needs,” said Fannie Mae. “It is best practice for associations to obtain a reserve study, keep it updated, and follow its recommendations for reserves and maintenance.”

Projects that budget less than 10 percent of the association’s assessment income may be at increased risk for significant deferred maintenance and special assessments, Fannie Mae said.

Next: How do lenders and appraisers address deferred-maintenance issues if they do not have access to the documents which now are sold by condo management companies?