“Is Your Condo or HOA on the Fannie Mae Unavailable List?” – KSN attorney Michael Kreibich discusses the emerging topic of the Fannie Mae Unavailable List and its impact on condominium, homeowner (HOA), and townhome community associations. “Topics include proactive planning, deferred maintenance, special assessments, reserve requirements, documentation, board member responsibilities, and more. (21 mins.)

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Episode Transcription

Bernie: You’re listening to the KSN podcast and today we’re asking the question, is your condo or HOA on the unavailable list? Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals and landlord tenant law. I’m Bernie and today we’re joined by KSN attorney Michael Kreibich. Mike practices condominium, townhome and homeowner association law in the city of Chicago and the surrounding suburbs advising clients and property managers on how to stay on top of legal requirements across the community association spectrum. Welcome to the KSN podcast, Mike.

Michael: Hey Bernie. Thanks for having me.

Bernie: Today we’re talking about something that has recently started to become widely known, a potential unavailable list or blacklist for properties that do not meet new requirements for financing or lending and a lot of these changes were created in the wake of the tragedy in Florida. So, this was in 2021 where a 12-story beachfront condo building in Surfside Florida partially collapsed and that collapse resulted in numerous deaths. I believe it was 98 people and is considered one of the deadliest building collapses in the history of the US. Following that collapse, there were a number of investigations into the cause, a combination of factors; design, construction deficiencies, building deterioration, insufficient maintenance and or repairs and that tragedy raised many concerns across the safety of other buildings leading to increased inspections and regulations. In response to all that Fannie Mae, the Federal National Mortgage Association and the Federal Home Loan Mortgage Association, that one’s commonly known as Freddie Mac, both created new sets of requirements that impacted associations. Mike, we’re not going to get into Surfside, that could be its own completely different topic because again, it was a catastrophe. In this case, we’re going to focus on these guidelines that have now been set and how associations have to operate under them. What are some of the factors that these new guidelines address, Mike?

Michael: As you kind of touched on, there’s a lot of moving parts and this is kind of a recent revelation that there was such a thing as this, we’ll call it the blacklist of associations. So, the industry is kind of trying to get themselves or get a grasp on what it means and who it applies to. As you said, you know, there’s a lot of moving parts here and you know, the collapse of the building and Surfside is what kind of put the spotlight on what associations are doing overall as it relates to the overall structure and the condition of their buildings in the association. So, there’s a number of factors that it appears that Fannie Mae, Freddie Mac, or we can call it lenders generally, are looking at when they are making their decisions and when I say decisions that could be a couple different things. It’s lending to individual owners who are potentially purchasing in association buildings or associations, period. Or it also means if they’re going to potentially lend money to the association, there’s just a higher level of scrutiny recently subsequent to this collapse that these lenders generally are starting to look at and they want to dig deeper into the association’s finances and essentially their maintenance plan. What is it that they’re doing to keep up their obligations and their property values? The things are listed that we’ve been seeing more and more are significant deferred maintenance and unsafe conditions, they look at. They look at if there are special assessments that have been adopted by the association, they are looking more and more at reserves and potential reserve requirements, if there’s project eligibility waivers, also documentation like engineering reports, inspection reports, condo questionnaires, and they’ll also be looking into the HOAs meeting minutes.

Bernie: And I’m glad you mentioned lenders, Mike, because Freddie Mac and Fannie Mae kind of set the cadence for other lenders. When they raise their bar, change their requirements on what they’re looking for, other lenders lockstep, they change or revise their requirements because that’s what Freddie and Fannie Mae are doing.

Michael: Correct. So, Fannie Mae and Freddie Mac are the, for lack of a better term, the whales of the industry. Those are the benchmark that most lenders, and I say most because we’ve seen now each lender has their own requirements, but they do certainly try to follow what those two major lenders, Fannie Mae and Freddie Mac are doing and they have kind of, as you said, set the bar as to what we, from the industry and what associations should be paying attention to when they’re doing their day-to-day business and they’re looking at future expenditures and what capital expenditures are necessary for their association.

Bernie: So as properties come up on this unavailable list that are ineligible for Fannie Mae financing or lending, how is that presenting an issue for community associations based on these regulations?

Michael: So here I also want to take a slight step back. So, l from a big picture standpoint with the community associations, and this is what we see from a legal standpoint, this predates Surfside. Members of associations run for the board of directors and a lot of times the platform that they run is, I’m going to keep the assessments low. Okay? So, they’re going to say vote for me because I am going to keep assessments at the level that they are, or we’re going to reduce assessments. Well, that is a wonderful platform to run on. The issue with that is like everything else in the world right now is the cost is going up, the cost of a gallon of milk is going up, the cost of a gallon of gasoline is going up. We noticed during covid that the cost of materials was going up. At the end of the day, everything is becoming more and more expensive and like anything else, unfortunately your assessments and the costs for the things that you need to have done are going to be impacted.

So simply saying, I’m not going to raise assessments, that was fine but what it did do was create a shortage of funds. And because of Surfside, you have lenders looking at, and I said earlier, reserve requirements. Okay, so now they’re starting to come up with guidance. In some instances, they’re saying 10% of your budget should be earmarked for reserves. There’s associations unfortunately that for years and years and years have been underfunding their reserves or not funding their reserves period and that has resulted in a number of capital projects, capital expenditures, whether it be facade issues, roof issues, if they have erosion issues in some scenarios where their land is eroding away, they simply aren’t addressing those issues. And what we’re hearing and what we’re seeing is that these lenders are no longer going to tolerate simply sticking your head in a hole and saying, well, we didn’t have the funds for it. It’s basically forcing the hands of associations and boards to take a more serious look at what are they charging right now currently for assessments and what are their needs and making sure that those two things are more in line with each other, that the assessments are high enough or at a level to address the future needs.

Bernie: So, from what you mentioned Mike, there’s some examples on how this may impact owners, potential buyers; I’ll just run through a few. You may have a unit owner who’s attempting to refinance and that could impact because they may not have access to affordable lending rates. Certainly, the process in the lending may take longer because you may have Fannie Mae not providing a mortgage for that property because it’s on that unavailable list and it’ll delay the process because it needs time to review. You may have new buyers that need to put down higher down payments that could potentially limit unit sales. You have new buyers that again, may have to seek alternative mortgage options that could limit the potential pool of purchasers because they don’t have access to those cheaper lending rates or cheaper lending products. Again, we’re talking about a lot of moving parts here, but in the end, all of this has a widespread impact on current potential future owners. How does that impact the community?

Michael: So, you go through a couple of really important points. At the end of the day, if I was trying to narrow it down, you know, somebody says to me, why does this matter and why should I care if I’m on the board? We come back to the concept of fiduciary duty. So, you have fiduciary duties as board members to your association and your association members. Some of the most important things that you, when you get on the board that you should be taking into consideration is, one, the safety of the people in your community, right? And Surfside was an example of very serious safety concerns and then a secondary thing, because I think the safety obviously is the single most important thing, but a secondary thing is the marketability and value. You are a not-for-profit corporation as an association and your job is to try to maximize the value of the property, right? So, you buy property, and the desire should be to continue to advance the value and that means that you have to be taking steps over time.

Again, that’s reserves, that’s making sure that all of the things that are going on at your property are properly done in a timely manner and you know, if you have different reserve studies being done giving you advice as to what the useful life of something is, let’s say it’s your roof, whatever it might be, those are the types of things that boards need to be taking serious consideration in what they’re doing over time. It’s very easy to get caught up in the here and now, but there’s a requirement and Surfside kind of pointed to that, that you should be forecasting. You should be putting aside money and you should be aware of what the issues are and taking steps to ensure that you are addressing those issues as they come up. That tragedy that was Surfside, it did give guidance on how they should be looking at the different things that are happening over time and it’s not simply just looking the other way. You have to have some foresight as to what’s going on in your community.

Bernie: KSN is committed to educating our clients and the community. As a service to our current and prospective clients, we’ve authored and compiled a number of educational resources for condo, HOA board members, property managers, landlords, and real estate professionals. If you visit ksnlaw.com/education, you’ll be able to review our educational resources, including articles, legal updates, booklets, podcasts, laws and ordinances and more. You can also sign up for the KSN newsletter where over 30,000 peers receive free industry news, legal updates and details on our upcoming events. So, you mentioned being proactive, preemptively dealing with repair and safety issues. Let’s get into some proactive best practices that board members and property managers should consider, Mike, because we’ve talked about the problem. Now let’s talk about some potential solutions.

Michael: Sure. So again, and this goes with almost all the topics we discussed, Bernie, the proactive approach is going to be working with professionals, right? So, working with your management company, working with your attorneys. If you are working with any engineers or any reserve study company, you want to make sure that you have all of the information necessary, right? So, you’re a volunteer board member. You have to make sure that you are surrounding yourself with people who are able to give you advice and information to support the decisions you make. This is an example of that where you want to make sure that you are working with the professionals to ensure that you know about any of the issues ranging all the way down to something that just simply needs to be on your radar because it’s something that might be an issue in the future. So some of the things you should be doing as a board, one that we do regularly for our associations, and I think it’s highly valuable as a tool for the board, is to create a maintenance responsibility chart. What that is, is simply a document that dissects your governing documents, very simply and succinctly tells you what the association responsibility is versus what is a homeowner’s or member’s responsibility. Those documents are intended to be digestible documents that can easily be referenced.

And again, we create them regularly off of what the governing documents say because the governing documents, the declaration bylaws and rules and regulations can sometimes be convoluted and difficult to read. A maintenance responsibility chart is intended to be something that you can quickly reference, and you’ll know, for instance, who’s responsible for snow removal, for pest control, for landscaping, for HVAC, balconies, you name it. Anything that’s out at your association, the purpose of that document is for you to have an easy reference tool. So that’s one. Another thing you can do from a board standpoint is organize the association documents. All too often we run into scenarios where over time there has been an amendment to the declaration, there has been some type of change made and people come on to the board and they’re not aware of changes that have been made or who’s responsible for what. I highly recommend that we as a team, legal and the board that we create a place, whether it be a board member handbook that has all of the governing documents. So, when somebody new gets on the board, either physically or virtually turn this information over to the new board members because that should be the association’s bible. It should have all of the information necessary, all of the governing documents in one place so that each board member has an opportunity, if they choose, to avail themselves of full knowledge of the documents. So that’s another one.

Michael: The other big one too is evaluating the association’s budget. There’s an obligation legally for you to have an annual budget done. This is usually done in lockstep with your management company. Your management company as professionals prepares budgets for their associations every year, and they have expertise in that area of preparing a proposed budget, but ultimately the board makes the budgetary decisions. I think that that is a huge tool for the board to know where the money is going and what items, especially capital expenditures are you trying to tackle each year and that would be something that I would show up in the budget. Prior years budgets are good, but maybe it wasn’t done so well in the past. That’s something that the board should spend a lot of time digging into and making sure that it’s done appropriately.

Bernie: And something we’ve talked about on different podcasts before, Mike, is how inflation is impacting associations. You can’t just cut and paste the budget year after year because you have the cost of amenities, of vendors that continue to rise of association resources. So again, evaluating the budgets on a regular basis, looking at association reserves, you can’t just assume that a prior year’s budget can just roll over into the next year’s budget, right?

Michael: Correct. You hit it right on the head, Bernie. One year’s budget, and I see it all too often, they will simply say, oh, we put aside this amount of money for this year, therefore we’re just going to roll that number forward. That may very well be true in some instances on your budget, but it should not be a cut and paste because one year of landscaping, you might have decided to do more in your landscaping. You may very well now see that you have reached your useful life of your roof and you have to address that in the next budget. It happens all too often what you just said though, that they simply just move that budget forward and there’s no anticipation. And that’s a mistake because as a board, one of your fiduciary obligations is to administer the property and know and forecast for what’s coming in the future. So, I would agree with you, Bernie, that simply cutting and pasting and rolling a budget forward kind of has a lack of foresight and anticipation and that’s kind of one of the themes of this discussion.

Bernie: And that’s where you have issues where if an association is underfunded, if they have an underfunded reserve account, that can be a red flag for potential buyers for mortgage lenders and this goes back into something that again, you also work with on a regular basis. Owners who are looking to buy in an association, they request documents, and you have to prepare, say for example, a paid assessment letter or questionnaire, and those are now falling under the requirements for this unavailable list. You have the higher requirements and thus you have to take that into account when you have to prepare those document requests, right?

Michael: Absolutely. So that’s a good point. So, you as an association have certain obligations to your owners, your members who are selling, okay? So, there’s statutory requirements that you supply specific information. Some of that is your budget, some of that is what you have in reserves. They have a right to know, and rightfully so. If somebody’s going to buy in your association, they have the right to know what’s going on financially and what work you have done and this kind of comes back to another topic I mentioned early on one of the factors in Fannie Mae and Freddie Mac review is their special assessments? People need to understand that the money is coming from somewhere, right? And somewhere is its membership, that money is coming by certain or very specific ways. It’s coming in regular assessments over time, and portion of that regular assessment should be going into reserves or it’s coming in the form of a special assessment. There is no magic place where money comes from. The money comes from its membership and an association is only as healthy and strong as its ability to collect its assessments, regular and special, to fund all of this work that’s being done. Some of the troublesome things that we get involved in from a legal standpoint is when a board, I said earlier, runs on a platform of keeping assessments low.

Again, the money only comes from the members. That requires then if there is a capital expenditure, a special assessment. Special assessments are one of the things in our industry that causes the most problems, legal and problems, for the board, because now you’re going to ask your membership for a large sum of money. So instead of doing overtime and forecasting and collecting money and putting it in reserves, you’re going back to these individuals and asking for large sums of money that they likely, personally didn’t budget for and that’s where legal battles ensue.

Bernie: May sound like a broken record, Mike, but I think in the end we’re talking about board’s, property managers being proactive, creating a maintenance responsibility chart, organizing association documents, evaluating the budget, the reserves, being prepared for those document requests. In the end, this is about being proactive so that way you’re doing everything you possibly can to not be on this unavailable list.

Michael: Correct. It’s asking the questions and getting prepared before the issue, being proactive, getting the maintenance responsibility chart, knowing what the association’s responsibilities are, having as we’ve discussed recently, having the documents ready for when somebody makes a request because these lenders are now requiring them, working with the professionals, which is what we’ll always recommend, working with, if you have a reserve study being done, your manager, your attorneys, the team aspect is what makes this all work and that’s being proactive, getting in front of the issue before it gets to the point where you know it’s too late. And sometimes that’s what we run into is that people take the position of, well, we didn’t know, or we didn’t do this, and now the problem is much worse. So, I’ll always recommend that the boards work closely with their trusted professionals.

Bernie: That was KSN attorney Michael Kreibich. Contact our law firm if you’re a condominium, homeowner or townhome Community Association, has questions regarding these new condominium requirements, the board’s fiduciary duties, building codes, reserves, document retention, litigation, or other legal concerns. KSN is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients since 1983. If you’d like to reach Mike or any of KSN’s experience attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.


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